Osborne’s cut to pension tax relief will hit final salary schemes

06 Dec

Chancellor George Osborne’s assertion that only 1 per cent of pension savers would be affected by his reduction to the maximum amount people can pay into a pension annually without tax is disingenuous to say the least. 

Mr Osborne, in his Autumn Statement on Wednesday, said he would slash the annual allowance from £50,000 to £40,000 and commented that 99 per cent of savers’ annual contributions amounted to less than £40,000, implying that they would be unaffected by the move.

The Chancellor claims that by lowering the maximum annual tax-exempt pension contribution to £40,000, he is raising more tax revenue by directly targeting the rich.  This is disingenuous as it will, without question, hit middle income savers too.  But this was not explicitly expressed, meaning some people might think they’re not affected and end-up with a nasty surprise.

Many people will see the headline figure of £40,000 and assume that Mr Osborne’s changes don’t apply to them.

However, under a final salary scheme, individuals do not necessarily make their own annual contributions but that does not mean they are safe from the lowering of the annual allowance. For Defined Benefit schemes, the annual accrual is ‘x 16’, so anyone whose pension scheme is accruing over £2,500 per annum (£2,500 x 16 = £40,000) could receive a shock tax bill at the end of each tax year.

It’s clear, therefore, that in reality this reduction in the annual allowance from £50,000 to £40,000 affects many thousands of people earning £40,000 or £50,000 per year with a pensionable service in a final salary scheme.

Companies, some of which have many thousands of members in their scheme, will also be faced with a sharp rise in costs of managing these pensions, due to a far greater number of employees falling within the new ‘tax net’.

Therefore, we fully expect that this will speed-up the end of final salary schemes in the UK.

Nigel Green deVere Group

Blog written 6th December


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