Pension tax relief reforms

SouthernLol

Hi there - Mr Lol is a higher rate tax payer in a (closed to new entrants) final salary scheme.

We've been hearing worrying things about the proposed tax changes on the projected accruals and it sounds like people will be leaving the scheme in droves and putting their money in the company's new defined benefit scheme.

Are we going to get really stung for tax if we stay?

I'm not really sure what's supposed to be happening regarding the govt. white paper, so if anyone knows and can explain it in words of half a syllable - preferably with some pretty pictures as well - then I'd be very grateful.

SouthernLol

bendix

Yes, and No.

The coalition has said it intends to cancel Labour's plans and instead bring in a much simpler system whereby people can only put a maximum of 35-40k in a year tax free.

For most people in defined contribution schemes, the impact will be minimal. I put slightly more than that into my pension, but I'm not too worried.

The real impact will be on people in defined beneft schemes because there will be a complex calculation which works out how much is being deemed to be added to your pension to get the defined benefit. As it's widely known that those in defined benefit schemes usually have much better arrangements, the implication is that the value of the contribution by you and your employer could be deemed to be higher. In a sense it depends on your salary, but obviously if your other half is in the top tax rate (50%?), then it's likely his contributions could be deemed to be over the threshold, ergo more tax due.

The bottom line is that you need to get some advice as to what the value of the contributions to the pension are deemed to be. It will be a complex actuarial calculation.

hugheskevi

A consultation on the change closed on 27th August. Nothing else has been released yet, so there is no certainty about how the new system will work at this point.

The change won't start to apply until April 2011 at the earliest, so there is no need to do anything just yet.

Whether you get caught for tax if you stay is likely to depend on the number of years accrued (if you have been there a long time you are more likely to be caught) and the change in salary over the course of a year - a big increase, eg, promotion, is more likely to put you above the limit, and of course higher earners in general are more likely to be affected.

The Govt. will have to announce what they have decided to do over the coming months.

Once they announce that, you can assess whether you will be affected, at the moment there isn't much you can do until there is an announcement about the form the restriction will take, so keep an eye out for that then get some advice.