- Changes will hit ordinary people as well as ‘fat cats’ says KPMG
Wednesday 5th December 2012
Commenting on the reductions on the pensions annual and lifetime allowance eligible for higher rate tax relief announced by the Chancellor today, Mike Smedley, pensions partner at KPMG in the UK, said:
“It is of course disappointing that Government is tinkering with tax and pensions again, less than two years after the current regime was introduced. This change will bring more ordinary people, not just “fat cats”, into the complicated area of tax charges on their pensions entitlements. Because people are not able to save uniformly for pensions over their careers, it will affect the pensions planning of many people as they approach retirement.
And it can only serve to work against Government’s stated aims of encouraging and reinvigorating workplace pensions.”
In his Autumn Statement the Chancellor has announced a reduction in the pensions Annual Allowance, from £50,000 pa to £40,000 pa, effective from 2014/15.
This reduces the amount of tax-relieved savings which can be made each year into a pensions arrangement. For defined contribution schemes, the effect is straightforward – a reduction of £10,000 pa in annual contributions. This will affect relatively few people in the short term.
He has also announced a reduction in the Lifetime Allowance, from £1.5 million to £1.25 million, from 2014/15. This will cause more people to pay extra tax at retirement, if their benefits exceed this limit. For someone receiving a defined benefit pension, this equates to a pension of £62,500 pa.
Mike Smedley commented: “Longer term this will result in many more people being unable to accumulate a decent level of retirement savings relative to their income, leaving them short even of the reduced Lifetime Allowance. Most people do not save for pensions in a uniform manner over their careers – pensions savings is weighted towards the latter part of careers, after such things as housing and family costs have abated. Further, a reduction in the Annual Allowance will reduce the flexibility to save bonus and redundancy payments for retirement.”
Someone starting at age 25 to save for a pension, at a salary of £25,000 pa and a 10% contribution rate, over a 40 year career with salary rising to £75000 and contribution rate rising to 30%, and in addition making extra contributions up to the new annual allowance in their last ten years, with 4% pa investment growth would realise a pension of only 53% of their final salary. This corresponds to an estimated pension of 60% of final salary with an unchanged Annual Allowance of £50,000.
The effect of the reduced Annual Allowance will also be widespread for those still accruing benefits in defined benefit schemes, the majority of whom are in public sector schemes. Anyone who has already accrued significant service, and receives an above average salary increase (e.g. on promotion) could be affected. For instance, someone with 30 years’ service, receiving a 10% salary rise, would be subject to a tax charge if their salary was at least £43,000 pa.
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