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Tax relief on pensions is reduced | Tax relief on pensions is reduced |
(40 minutes 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 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 40% tax bill. | |
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. | |
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. |
'Vast improvement' | 'Vast improvement' |
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. |