Deloitte welcomes pension reform plans

Business advisory firm Deloitte has welcomed plans for a more affordable system of tax relief for pension contributions, which were announced by the Government today.

The changes, which will take effect from April 2011, will impact high earners, but not affect the great majority of employees and self-employed.  Everyone will be able to retain a tax-favoured pension, which the Government Actuary estimates could pay a joint-life indexed pension of up to £54,000 a year.

Andrew Mewis, head of pensions at Deloitte in the Midlands, said: “The introduction of the new system of pension tax relief in place of the higher income access relief charging provisions is welcome. This alternative approach of a reduction in the annual allowance means everyone, regardless of how much they earn, will be able to make tax efficient pension contributions.

“The impact is unlikely to affect individuals earning less than about £100,000pa, although long-serving participants in generous final salary schemes could be affected at lower salary levels, perhaps down to £70,000pa.”

Mr Mewis said the changes are relatively easy for those in defined contribution schemes to follow.  Contributions above the £50,000 limit will not qualify for tax relief.  However, he said the position is more complicated for those in final salary schemes.

“For those in a final salary pension scheme will face tax charges should the value of their pension benefit increase by more than £3,125pa,” he said.  “Pension schemes will need to provide information to their members, so that tax due can be calculated.”

Deloitte also welcomed the Government’s decision to retain the transitional protections offered in 2006, when the system of pension taxation last changed.  As part of the reforms, the Government will also consult on offering transitional protection to those affected by the reduced lifetime allowance, which recognises the long-term value of pension saving. Some form of ‘pension growth protection’ will also be introduced. 

Mr Mewis said: “The ability to carry forward unused annual allowance from the previous three years (including the current period where we have the anti-forestalling legislation) will help people with irregular earnings and thus pensions savings patterns.  

“We don’t yet know when the outcome of the second consultation document on alternatives to annuities at age 75 will be released.  One would anticipate that the changes are unlikely to be implemented with effect from April 2011.  Once these details are known, individuals will be better placed to know how the new pension arena will assist in their provision of retirement benefits.”

Mr Mewis said employers should be actively undertaking impact assessments to identify those employees who could be affected by the changes and effectively communicate the implications.  

He added: “Employers will need to decide what alternative pension savings can be made available to high earners.

“The Government is likely to encourage employers to use schemes that pay tax at the beginning with financially efficient saving models built in, such that the Government’s revenue targets will not be affected, and so we expect more interest in this type of plan. Some unfunded plans may look attractive too, although these can involve longer term administrative involvement from employers.”

 Deloitte will be holding a series of seminars in Birmingham to discuss the impact of the pension reforms.

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