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Pensions experts today responded with dismay to Chancellor George Osborne's announcement that the annual tax relief allowance for savings will be cut from £50,000 to £40,000 from 2014/15.
The lifetime allowance will be also be trimmed, from £1.5m to £1.25m, said Osborne in his autumn statement to the House of Commons.
A taxpayer whose benefits are worth more than the lifetime allowance will pay the lifetime allowance charge on the excess. The rate will depend on how the excess is paid. If it is a lump sum, the rate will be 55%; if it is paid as taxable pension, the rate will be 25%.
A transitional fixed protection regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance. It will work in the same way as that introduced from April 2012.
Ministers will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
The government has confirmed there are no proposed changes to the carry forward rules for the annual allowance, meaning the £50,000 limit will be the basis for the unused amounts arising from 2011/12 to 2013/14 and available for carry forward to 2014/15 and subsequent years.
The latest pensions revamp will not affect the facility for a scheme to pay the annual allowance tax charge in return for a reduction in an individual’s promised benefits. (Under the facility, the administrator pays the tax for an employee if his or her annual allowance charge for the tax year is more than £2,000 and savings in the scheme for the same year are more than the annual allowance.)
Todays changes, although well-trailed, were greeted by a disheartened pensions industry as further complications for a multifaceted area.
PricewaterhouseCoopers’ Raj Mody claimed they will “completely undermine confidence and trust in pensions” through a “direct blow to the savings culture” that could threaten the existence of the few private sector defined benefit (DB) schemes that remain.
“Employers may also be inclined to lower their contributions to defined contribution (DC) schemes to avoid inadvertently breaching thresholds,” he said and warned that savers in DC schemes were likely to suffer.
“Someone saving the maximum of the £40,000 annual allowance into a DB scheme would receive a pension of £2,500 a year, but a DC saver investing the same amount may only be able to secure a pension of around two thirds… because of current annuity prices.”
Moody continued, “The cut in annual allowance means savers in DC schemes who want to contribute the maximum amount could be losing out on £300 of pension payments a year. It is unhelpful to reduce the allowance thresholds at the time when the government is trying to encourage people into DC pension schemes through auto-enrolment.”
Robin Hames of Capita Employee Benefits said the changes are “bound to catch out high earners with career breaks, and entrepreneurs who may try to fund their retirement after establishing their business”.
He warned of “more complexity around fixed, primary and enhanced protection [that] could signal another round of complicated protection legislation”.
Ernst & Young partner Patrick Stevens said the government’s announcement will “deter contributions above the annual amount and will particularly impact upon some of those within defined benefits schemes, including many civil servants, teachers and nurses.
“Last year’s changes allow the resulting large tax charges to be offset from pension pots, avoiding an immediate cash charge,” added Stevens.
