News from the Treasury:
The annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.
“Tax-privileged” is a tax break to you and me by the way. The governments estimates that in a normal full year these changes will bring in an extra £4 billion and affect around 100,000, four out of five of whom have incomes of over £100,000.
Reducing tax breaks for the most well off has long been Liberal Democrat policy. Good to see the government following in those footsteps.
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9 Comments
But the effect of these changes will be that all the remaining defined benefit plans in the Private sector will close. Once senior managers get no benefit from being in them they will shut them down (not nice but human nature). I suspect contribution rates to DC plans will also go down.
The law of unintended consequences strikes again.
@SMcG: What a bizarre post. So we should continue to grant unfair pension tax-perks to the very wealthy because otherwise they will stop supporting the system that benefits them so much? I’ve heard it all now. No doubt Labour will use absurd arguments like that to attack this proposal.
@SMcG: I disagree too. In all of the large corporates where I’ve worked the handful of senior execs who would be in a position to make (or benefit from) pension contributions of this magnitude in a single year already sit in their own, separate pension schemes, over and above the DB schemes in place for the vast bulk of the workforce. I do know of a handful of DB schemes still in place in large corporates, though typically these are now on an average rather than final salary basis.
@SmCG
Nonsense, ‘senior managers’ will still get benefits from defined benefit schemes, just that only the first £50,000 of benefit will be tax free. Close a scheme and they get no benefit.
I am trying to describe the world as it is rather than as we would like it to be.
There are still a fair number of DB plans open to future accrual while being closed to new members, although I agree some of them are now on a career average basis rather than final salary. The lifetime cap is now lower so many more people will get caught by that.
@Dominic – I am not sure you are right I think they may have higher accrual rates or be able to take their pension without reduction at a younger age rather than being in a separate plan. Even if they are in a separate plan which they have to close down I strongly suspect that they would take the opportunity to cut the main plan as well.
@mark – you havent understood how the new rules affects DB plans.
“The lifetime cap is now lower so many more people will get caught by that.”
@SmCG
So how much might someone be putting away in a pension scheme over a 40-year career to end up with a fund of £1.5 million on retirement?
@SMcG It depends what you mean by senior managers. In most organisation, those with the power to make decisions over whether the employee schemes continue are at board level, and have separate director pensions.
£50K a year in pension contributions is a LOT of money to put into your pension BTW. Most people with contributory schemes would be putting more like £5K in a year, including their employer’s contribution.
@nonconformist – you don’t get it.I am not saying anything about the justice of these proposals I am trying to explain the reality of what the effect will be
@mrs b I don’t think this is the case. Where they get a better pension it is better provision as part of the same scheme.
50k is a lot of money but that is not really the point.
@SMcG
“But the effect of these changes will be that all the remaining defined benefit plans in the Private sector will close. Once senior managers get no benefit from being in them they will shut them down (not nice but human nature). I suspect contribution rates to DC plans will also go down.”
These proposals will have been carefully scrutinised by experts, and the estimated £4 billion will be the saving they estimate.
Six months ago, I wouldn’t be so sure, because we’d only learn what ministers allowed to be announced. But now, ministers know this information, unspun, will be available through the OBR.
Assuming the OBR confirm the increased revenue, £4 billion is a lot of money, four times the amount raised from the child benefit changes, and is very welcome.