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, Steve Simkins, KPMG’s head of public sector pensions, said:
“The new pensions Annual Allowance, reduced to £40,000 as part of the government’s drive to reduce the deficit, will leave many public sector workers facing unintended consequences, bearing the brunt of the changes.
“This change, together with the reduced Lifetime Allowance of £1.25m also announced today, is designed to restrict pensions tax relief for people earning over £100,000 a year. However, public servants earning as little as £40,000 a year could incur a tax charge because of public sector pay scales”
“To add to this, public sector employers are committed to fixed pension arrangements and so are unable to respond to the additional tax charges by reducing benefit accrual in the way private sector employers can.
“This means that talented teachers, doctors and civil servants will see further benefit reductions in addition to the Hutton benefit reforms.
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.
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.
A reduction in the Lifetime Allowance, from £1.5 million to £1.25 million, from 2014/15 is also announced. 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.
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