Government cuts high earners’ tax free income that can be paid into a pension to just £50,000

The government has slashed the amount of tax-free income that high earners can put into a pension by 80%, from £255,000 to just £50,000, it was announced today by Mark Hoban, financial secretary to the Treasury. He said the move will affect up to 100,000 high-earning pension savers.

From April 2012, the government will also reduce the lifetime pensions savings allowance that benefits from tax relief from £1.8m to £1.5m. But high earners will continue to be paid tax relief on pension savings at the highest rate at which they pay income tax.

The government said the majority of those in final-salary schemes would not be hit by the cuts as people who exceed the annual allowance due to one-off spikes in pension accrual (such as a sudden salary rise) will be allowed to offset them against their unused allowance from up to the previous three years.

Wealthy individuals who do face substantial tax charges from breaches of the lower annual allowance should be able to pay the charge out of their pension benefits, rather than current income.

The government claims pensions tax relief was costing £19bn annually by 2008-09 and the cuts, to be introduced in April 2011, will save it £4bn a year.

Under the Labour government’s proposals, people earning more than £150,000 would have had the level of tax relief they received gradually tapered to 20%, even if they paid income tax at 50%.

Hoban 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. We have taken a tough but fair decision.

“The coalition government believes that our system is fair, will preserve incentives to save and – compared to the last government’s approach – will help UK businesses to attract and retain talent.”

Chris Noon from Hymans Robertson said the new rules were better than expected but thought the numbers were surprising. “The government expects the £4bn savings to come from around 100,000 people, meaning each person affected is contributing at least £35,000, which is very high. I find it strange that the government can make the numbers work on that basis.”

He added that if the government did, as expected, allow individuals to pay any resulting tax charges from pension benefits, pension schemes will find it very difficult to administer. “It’s difficult to calculate so I find it hard to see how that will work in reality. The government will be hoping most people pay any extra charge through self-assessment.”

John Cridland, CBI deputy director general, said: “Today’s announcement is not as bad as feared as the government had considered making the annual allowance as low as £30,000. It rightly heeded warnings about the impact that restrictive regimes can have on pension saving, and these new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable.”

Maggie Craig, director general of the Association of British Insurers, said: “It is right that this plan keeps the important principle of pension tax relief at the marginal rate of tax paid. This will help keep those senior decision makers, responsible for staff pension schemes, engaged and supportive of pension saving.

“While we would have preferred the lifetime allowance not to be reduced, the industry understands the current fiscal pressures, and stands ready to play its part during these challenging economic times. We will urge the government to review the levels of the annual and lifetime allowances over time to ensure they stay in proportion to earnings, so that future pension savers do not lose out.”

However Brendan Barber, general secretary of the TUC, said: “This is a big missed opportunity. What we need is a much more serious discussion of pensions and tax relief. At present it costs a higher rate taxpayer just 60p to put £1 into their pension because they get 40p tax relief. But a standard rate taxpayer – the real middle income Britain – gets only 20p relief, so it costs them 80p to save £1. Reform of the tax treatment of pensions savings could unlock billions that could be used to improve pensions for ordinary people. Instead millions of pensioners are facing cuts in income because of the government’s switch to CPI indexing.”

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Government moves to link public sector pensions to the CPI mean projected pension values cannot be calculated

Thousands of public sector workers are being denied information about the value of their pensions by the government while it implements changes laid out in the recent budget.

The problem will primarily affect workers who are in the process of getting a divorce. When couples separate they finalise their financial arrangements through a consent order, a legally-binding agreement reached between spouses based on the value of their current assets. If there is a public sector pension involved the only way of getting a snapshot of its value is to order a cash equivalent transfer value (CETV), which gives an instant value at today’s prices.

Public pension scheme administrators have been told by the government to suspend calculating CETVs while they move from linking public service pensions to the CPI rather than the RPI, a change announced in the June’s budget. The work, which has no completion date, leaves thousands of people unable to transfer pensions in the event of a divorce.

Chris Perry, a teacher currently going through a divorce, contacted Capita Hartshead, the administrators of his Teachers’ Pensions, earlier this week to find out the CETV of his pension pot.

“Capita were very friendly but told me they were not allowed to give me that information as the Department for Education (DfE) had embargoed it,” Perry said. “They said it was due to these changes introduced in the emergency budget.”

He added: “The man at Capita said he was looking at what my pension was worth on his screen, but he was unable to tell me. It is ridiculous. It is my pension, I paid into it and the government is restricting this information. If I had some kind of court date to satisfy it could have to be postponed at great inconvenience and cost.”

A spokesman for the DfE said: “We were obliged to instruct the scheme administrator of Teachers’ Pensions to temporarily suspend CETV activity outside of the public service pensions network. The suspension will remain in place until the CPI issues have been worked through.

“Only when that work is completed will the department be in a position to recommence CETV calculations. We are crunching the numbers at the moment but don’t have a timescale for when it will be done – sooner rather than later, hopefully.”

The delay affects not only teachers but those in the NHS pension scheme, firefighters, policeman and armed forces personnel. Given that there are about 3.5m NHS and teachers pensions alone, it could mean that tens of thousands of divorces are currently held up.

Phil O’Connor, adviser at the Divorce IFA, said: “It is a massive issue, especially when you think of the high divorce rate among the armed forces alone. Until the government has got all the factors in place this is going to leave thousands in limbo. I have already received letters about it because, in divorce cases, pensions can be the most important asset.

He continued: “You will still be able to get divorced but you won’t be able to finalise the finances – and no one knows how long this limbo will last for. They have said up to three months but it could be longer. The private sector will follow and that could lead to problems for many more people.”

Public sector workers who simply wish to know the current value of their pension shouldn’t be affected. It is only those who need to know the projected value of their pension (including employer contributions, for however many years they might be expected to live) who will be unable to obtain the figure.

The move to link public and private pensions to the CPI will result in people’s retirement income being cut, as the CPI is usually lower than the RPI, which includes housing costs such as mortgage interest payments. Accountants KPMG said this could reduce companies’ pension liabilities by 10%, or about £100bn, and experts warn that pensioners’ retirement incomes could be hit by up to 25%.

In divorce cases it means the spouse could see their share of any pension also plummet. O’Connor said: “They will get less, and because private pension schemes will likely follow what is already happening in the public sector it means everyone will experience the impact of the government’s new rules.”

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Most recently, Barclays said it was closing to existing members, and BA refused to rule out doing the same. Members of such schemes would be entitled to keep the benefits from what they have accrued so far in the final salary scheme, but all future contributions would go into a defined contribution scheme, where investment risk is shouldered by the members rather than the employer.

Schemes have been hard hit by stockmarket turbulence, falling interest rates and quantative easing, which has caused liabilities to balloon.

Government tinkering, such as the introduction of a tax on pension surpluses in the late 1980s by the Conservatives, helped convince employers to reduce or funding levels.

On the other hand City workers have seen their pay packets boosted by an average of six per cent, less than a year after bringing the world economy to the brink of meltdown.

As competition for ‘star performers’ pushes up salaries, a survey today revealed that financial workers and bankers were being offered around six per cent more money between June and July than in previous months.

This is despite many of the banks only being able to turn a profit because they have been bailed out with taxpayers’ money.
The City pay push also comes as a new report revealed six million Britons are now out of work and claiming benefit, many of whom are casualties of irresponsible City deals.
The actions of the financial sector are expected to cost a million Britons their jobs.
The average basic salary for banking staff and those in the financial services is now £53,223, thanks to a month-on-month rise, according to recruitment firm Morgan McKinley.

The group said pay is still one per cent lower than a year ago, but confirmed

While Bankers saw an increase in salary normal folk were seeing more bankruptcies.

The number of people declaring themselves bankrupt in the UK rose 22 per cent this quarter-year compared with the same period last year.
However, the London results were much brighter – only rising by 9 per cent since 2008, with just under 6,000 Londoners petitioning for bankruptcy.
John Bangham, a director at KPMG, said this number will continue ‘picking up steam as the myriad of consumers can no longer service their debt obligations.’
He added:’The insolvency figures will only increase.
‘Some banks are starting to offer mortgage products again.
‘[However,] securing debt on homes, either by way of refinancing or new mortgages, remains very tough for many people.’