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| Version 12 | Version 13 |
|---|---|
| Tax relief on pensions is reduced | Tax relief on pensions is reduced |
| (about 2 hours later) | |
| The amount of tax-free income that savers can put into pensions has been sharply restricted by the government. | The amount of tax-free income that savers can put into pensions has been sharply restricted by the government. |
| The annual limit will be reduced from £255,000 to £50,000 in April. | The annual limit will be reduced from £255,000 to £50,000 in April. |
| Experts have warned that some people with long service in final-salary pension schemes might face unexpected tax bills. | Experts have warned that some people with long service in final-salary pension schemes might face unexpected tax bills. |
| The Treasury hopes the changes will eventually save it more than £4bn a year - which could be used to reduce the budget deficit. | The Treasury hopes the changes will eventually save it more than £4bn a year - which could be used to reduce the budget deficit. |
| The lifetime allowance on money that can be built up in a pension fund and receive tax relief has also fallen from £1.8m to £1.5m, but from April 2012. | The lifetime allowance on money that can be built up in a pension fund and receive tax relief has also fallen from £1.8m to £1.5m, but from April 2012. |
| High earners will continue to be paid tax relief on pension savings at the highest rate at which they pay income tax. | High earners will continue to be paid tax relief on pension savings at the highest rate at which they pay income tax. |
| The coalition government began a consultation after the Labour government announced plans to gradually reduce the tax relief available on pension contributions for people earning more than £150,000 to just 20%, despite the fact that these people pay income tax of 50%. | The coalition government began a consultation after the Labour government announced plans to gradually reduce the tax relief available on pension contributions for people earning more than £150,000 to just 20%, despite the fact that these people pay income tax of 50%. |
| Numbers | Numbers |
| The government said that changing the allowance to £50,000 would affect 100,000 pension savers a year, and 80% of those had incomes of more than £100,000 a year. | The government said that changing the allowance to £50,000 would affect 100,000 pension savers a year, and 80% of those had incomes of more than £100,000 a year. |
| The formula for calculating the increase in someone's pension if they are in a defined benefit scheme will also become more aggressive. | The formula for calculating the increase in someone's pension if they are in a defined benefit scheme will also become more aggressive. |
| The increase in accrued pension will be multiplied by a factor of 16, not 10 as at present. | The increase in accrued pension will be multiplied by a factor of 16, not 10 as at present. |
| So someone whose pension entitlement increases by more than £3,125 in any one year may be faced with a tax bill set at their highest rate of tax. | So someone whose pension entitlement increases by more than £3,125 in any one year may be faced with a tax bill set at their highest rate of tax. |
| However they will be able to offset that year's increase in their underlying pension pot against any unused tax-free allowance from the previous three years. | However they will be able to offset that year's increase in their underlying pension pot against any unused tax-free allowance from the previous three years. |
| This will help people avoid a tax bill if they put more money into their pension scheme as a result of being given a one-off payment, such as a redundancy payment. | This will help people avoid a tax bill if they put more money into their pension scheme as a result of being given a one-off payment, such as a redundancy payment. |
| Mark Hoban, financial secretary to the Treasury, said the government had taken a "tough but fair" decision. | Mark Hoban, financial secretary to the Treasury, said the government had taken a "tough but fair" decision. |
| "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes," he said. | "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes," he said. |
| Labour attacked the government's announcement, with David Hanson, Shadow Exchequer Secretary to the Treasury, saying it would "hit some families on modest incomes extremely hard". | Labour attacked the government's announcement, with David Hanson, Shadow Exchequer Secretary to the Treasury, saying it would "hit some families on modest incomes extremely hard". |
| He added: "We support the principle that pensions tax relief should play a part in getting borrowing down. | He added: "We support the principle that pensions tax relief should play a part in getting borrowing down. |
| "But under our plans no-one earning under £130,000 would lose out." | "But under our plans no-one earning under £130,000 would lose out." |
| 'Vast improvement' | 'Vast improvement' |
| The government said that its mitigation measures would ensure that very few people earning less than £100,000 a year would actually have to pay any pension tax. | The government said that its mitigation measures would ensure that very few people earning less than £100,000 a year would actually have to pay any pension tax. |
| Experts immediately pointed out some important wrinkles in the government's plan. | Experts immediately pointed out some important wrinkles in the government's plan. |
| Tony Baily, at pension consultants Aon Hewitt, said: "The higher than previously proposed annual allowance and a relatively low valuation factor mean that the winners are long-serving, middle-income earners in defined benefit plans, many of whom will now not be affected by the annual allowance. | Tony Baily, at pension consultants Aon Hewitt, said: "The higher than previously proposed annual allowance and a relatively low valuation factor mean that the winners are long-serving, middle-income earners in defined benefit plans, many of whom will now not be affected by the annual allowance. |
| "The losers are high pension savers who get caught by the reduced and frozen lifetime allowance," he added. | "The losers are high pension savers who get caught by the reduced and frozen lifetime allowance," he added. |
| Marc Hommel, pensions partner at PwC, said: "As there is no current intention to increase the tax limits, many more people could be caught in future years particularly if inflation takes off." | Marc Hommel, pensions partner at PwC, said: "As there is no current intention to increase the tax limits, many more people could be caught in future years particularly if inflation takes off." |
| Ronnie Ludwig, a partner at Saffery Champness, said the new policy would discriminate against entrepreneurs. | Ronnie Ludwig, a partner at Saffery Champness, said the new policy would discriminate against entrepreneurs. |
| "Because it is based on the model of regular income and regular pension contributions, it effectively discriminates against the self-employed or small business owners whose income patterns are more uneven," he said. | "Because it is based on the model of regular income and regular pension contributions, it effectively discriminates against the self-employed or small business owners whose income patterns are more uneven," he said. |
| Tom McPhail at investment advisers Hargreaves Lansdown said the limits would still allow most people to build up a decent pension without incurring extra tax bills. | Tom McPhail at investment advisers Hargreaves Lansdown said the limits would still allow most people to build up a decent pension without incurring extra tax bills. |
| "This is a vast improvement on the tortuous system for restricting tax relief proposed by the previous government," he said. | "This is a vast improvement on the tortuous system for restricting tax relief proposed by the previous government," he said. |
| How it will work | How it will work |
| To illustrate how someone in a defined-benefit (normally final-salary) scheme will be affected, the Treasury gave this example. | To illustrate how someone in a defined-benefit (normally final-salary) scheme will be affected, the Treasury gave this example. |
| Take a woman who has been in her employer's pension scheme for 34 years, accruing pension at a rate of 1/60th of final salary every year. | Take a woman who has been in her employer's pension scheme for 34 years, accruing pension at a rate of 1/60th of final salary every year. |
| In her 35th year, her pay goes up by 20%, from £60,000 to £72,000 a year. | In her 35th year, her pay goes up by 20%, from £60,000 to £72,000 a year. |
| To work out how much her pension pot has increased, her accrued pension entitlement would be calculated as at the end of her 34th year. This would be £34,000 (34/60 times £60,000). | To work out how much her pension pot has increased, her accrued pension entitlement would be calculated as at the end of her 34th year. This would be £34,000 (34/60 times £60,000). |
| Then this would be revalued in line with the rise in the consumer prices index. If that had risen by 2.5%, then her accrued pension would now be £34,850. | Then this would be revalued in line with the rise in the consumer prices index. If that had risen by 2.5%, then her accrued pension would now be £34,850. |
| Next, calculate her pension entitlement at the end of her 35th year. That would be £42,000 (35/60 times £72,000) as a result of that year's pay rise. | Next, calculate her pension entitlement at the end of her 35th year. That would be £42,000 (35/60 times £72,000) as a result of that year's pay rise. |
| The increase in pension entitlement, at £7,150, would be multiplied by 16 to give an increase in her pension pot of £114,400. | The increase in pension entitlement, at £7,150, would be multiplied by 16 to give an increase in her pension pot of £114,400. |
| That would suggest paying tax on £64,400 - the surplus over the £50,000 annual allowance. | That would suggest paying tax on £64,400 - the surplus over the £50,000 annual allowance. |
| However, she might have unused pension tax allowance from the three previous tax years. | However, she might have unused pension tax allowance from the three previous tax years. |
| Let's assume she had enjoyed 5% pay rises in each of these years, then she would still have an unused allowance to carry over of £69,400. | Let's assume she had enjoyed 5% pay rises in each of these years, then she would still have an unused allowance to carry over of £69,400. |
| Adding that to her current year's allowance of £50,000 would give a total available allowance of £119,400. | Adding that to her current year's allowance of £50,000 would give a total available allowance of £119,400. |
| This would be more than enough to cover that year's increase in her pension pot of £114,400, so in the end she would have no pension tax to pay. | This would be more than enough to cover that year's increase in her pension pot of £114,400, so in the end she would have no pension tax to pay. |