Pension tax relief may be cut further

By Ian Pollock, Business reporter, BBC News


Government plans to restrict pension tax relief for the higher paid may be even more aggressive than those put in place by the previous Labour administration.

The coalition is planning to replace the big tax changes that Labour had put in place, starting next April.

These would have raised an extra £4.6bn by 2014-15.

However a Treasury consultation paper suggests a range of options, one of which might raise even more - £5.3bn.

The alternative proposals being put forward by the Treasury were welcomed by the National Association of Pension Funds (NAPF) which said they would be "less damaging" than Labour's plans.

"It's a simpler approach that that will encourage higher earners to stay in their workplace pensions, so helping protect pensions saving for all staff," said Joanne Segars of the NAPF.

Coalition plans
The Treasury suggests that each taxpayer's annual pension allowance - the amount their pension pot can grow tax free - should be slashed from the current £255,000 a year to between just £30,000 and £45,000 a year.

Under the Treasury plan, a £40,000 limit to the annual allowance - after which an extra tax bill would be generated - might be exceeded by someone whose pension entitlement in a final salary scheme had risen by just over £2,000 in a year.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA) said the coalition's plans might catch more people in the tax net who were considerably lower paid than those targeted by Labour.

"It is still likely that many earning a lot less than the £130,000 could be affected where they are in a defined benefit (final salary) scheme," he said.

"This will depend on the valuation method and length of enrolment in the scheme but could affect even those on half the £130,000 especially if they make additional voluntary contributions (AVCs)," he warned.

Pay rise impact
To work out the increased value of someone's pension pot if they are a member of a defined contribution scheme is easy.

They are given an annual statement each year of the value of their pension investments.

However membership of a traditional final-salary scheme involves using a formula in which the rise in someone's accrued pension is multiplied by 10.

Thus a pay rise, perhaps due to promotion, which had the knock-on effect of increasing someone's pension entitlement by £4,000 in a year would currently fall within a £40,000 limit.

However the Treasury is suggesting that this annual accrual should be multiplied by much more, perhaps by 15 or even 20.

More tax
The Treasury consultation document illustrates the possible effects of the new approach.

Its figures suggest that by 2012-13, a £45,000 annual pension allowance would raise a similar amount to that expected under Labour's plans - in the region of £3.6bn.

But a lower £30,000 annual allowance would raise £4.8bn - £1.2bn more than Labour intended.

By 2014-15, an annual allowance of just £30,000 would raise an extra £5.3bn in tax while a £45,000 annual allowance would raise £3.9bn by that year.

Those estimates take into account the possibility that some taxpayers might tweak their pay arrangements to avoid breaching the new lower allowances.

Raj Mody of the accountancy firm PwC said it was possible that twice as many individuals in final salary pension schemes would breach the new limit.

For example, a 50-year-old employee in a typical final salary scheme earning £80,000 a year who, through promotion, got a 20% pay rise, could find themselves with an additional tax bill of over £10,000, he said.

"An unintended consequence of the new regime is therefore likely to be a continued shift of employers and individuals away from final salary schemes to defined contribution plans," Mr Mody added.

Labour's plans
With the highest rate of tax now at 50%, Labour had planned to restrict the amount of tax relief available to the highest paid.

It had calculated that in 2008-09 a quarter of all pension tax relief, worth £28.4bn that year, was going to the tiny minority of tax payers who earned more than £150,000 - worth an average of £20,000 a year each.

To rein in the new 50% tax relief now available on top earners' pension contributions, Labour put in place two changes due to start next April.

The first was that tax relief would be tapered away from 50% down to 20% as people's incomes rose above the £150,000 level.

The second and more profound change affected those with incomes of more than £130,000.

If the value of their employer's pension contributions, when added to their personal income, took their gross income over £150,000, then they would start to be taxed on the value of those employer contributions at a rate of as much as 30%.

This approach was widely criticised as far too complex.

Many experts suggested that the coalition, if it still wished to rein in tax relief for higher earners, should simply restrict the amount by which anyone's pension pot could grow each year before it started to lose tax relief.

That is the plan on which the Treasury is now consulting.

Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

Millions more to wait until 68 for pension Read more: http://www.thisismoney.co.uk/pensions/article.html?in_article_id=509490&in_page_id=6&ito=1565#i

thisismoney.co.uk correspondent James Chapman posts:

More workers will have to wait until they are 68 to claim their state pension as the Government speeds up plans to raise the retirement age.

In an interview with the Daily Mail today, Work and Pensions Secretary Iain Duncan Smith says the move will save billions of pounds.
Labour set out plans to increase the retirement age to 66 by 2024 and 68 by 2046 to reflect growing life expectancy.

Before the election, the Tories suggested that it should rise to 66 sooner - by 2016.

But Mr Duncan Smith said workers would have to accept even quicker increases as Britain tightens its belt. The Government's timetable suggests that the retirement age is likely to reach 68 by 2038, meaning millions more - those born after 1970 - will be forced to wait for their pension.

This would, however, ensure that the state pension is more generous.

'We have to make the argument for it sooner,' he said. 'The truth is deferment of one year will add 1% to GDP (national output) and it will add up to 10% on your pension pot.

'The current plan to raise it to 68... we think could be accelerated. It seems silly to wait.'

Mr Duncan Smith also revealed that the Government is aiming to get 1.5m off incapacity benefit, more than half the 2.6m total claimants.

It is the first time that ministers have set a target for the number they want to get into employment or back-to-work schemes. Tough measures including testing 10,000 claimants a week have already been introduced to weed out cheats.

More than half of those assessed have been taken off higher-rate benefits because they are considered capable of doing some work.

'Every single one of them will be properly assessed for their level of incapacity,' Mr Duncan Smith said. 'We've started the job already. Those who can work will be given all the support to make sure they do just that. I intend to remove 1.5m off incapacity benefits.

'We will do everything to help people back in to work - retraining, help with interview - but in the end we expect people who can work to take the jobs that are offered them. If they don't their benefits will be incrementally cut.'

Mr Duncan Smith has suggested the age at which people can claim the state pension could be 'indexed' to increasing life expectancy, a reform pioneered in Denmark.

After the Second World War, the state pension age was set at 65 for men, at a time when life expectancy for a man was 66.4 years and for a woman 72.5 years.

By last year, life expectancy had risen to 77 years for a man and 82 years for a woman in England - but the pension age has remained the same. The latest estimates suggest that by 2056, the life expectancy for a man and woman living in England will be 84 and 89 years respectively.

The Labour government passed a Pensions Act in 2007 which means that for those born after April 6, 1959, the state pension age will increase from 65 to 68 between 2024 and 2046.

The Tories said in the general election campaign that they would increase the state pension age to 66 for men by 2016 and for women by 2020, faster than Labour planned, to help plug the massive black hole in the public finances. The Government has now launched a review to determine details of the policy.

The coalition also insists that workers should no longer be forced to retire at 65. People would not be forced to work beyond that age, but they would have the option and could even stay on into their 70s or 80s.

But business leaders have attacked the idea of an end to the statutory retirement age, insisting companies need some sort of 'cut-off point' when older workers must retire. There are concerns that companies would be forced to sack 'bed-blocking' older workers if they insisted on staying on year after year.

Paul Kenny, general secretary of the GMB union, said: 'The Government knows that manual workers in the industrial regions of the UK do not enjoy anything like the same life expectancy as professionals or other classes of employee.

'To force someone who has done a lifetime of toil on building sites, farms or in factories to work until they are 66 is completel y unacceptable.'

But James Elles, a Tory Euro MP, said: 'Should life expectancy be expected to reach 85 for men by 2050, should we not be planning for the pension age to be closer to 75?'

Mr Duncan Smith's plans for pension reform are one of a host of cost-cutting measures being submitted to the Treasury by Government departments as the coalition battles to rein in the unprecedented £149bn budget deficit left behind by Labour.



Something has to be done. People living longer and the baby boomers beginning to retire from February 2011 in increasing numbers. It only makes sense to work longer. This has been a ticking time bomb which successive governments have chosen to ignore! What do you think?

Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

The Cost of Retirement

Landmark reform of the UK pensions system aims to deliver increased financial security for an ageing population. But what impact will it have on small businesses?

We are living longer than ever before. By 2050, the number of people over 100 years old is expected to increase from 9,000 today to 160,000. However, there will only be two tax-paying workers for every pensioner, as opposed to the current ratio of four. To address this, the government has set about making radical changes to the existing pension system to deliver greater financial security for a rapidly ageing population.
In undertaking a landmark reform of the UK pensions system, it has completed a lengthy programme of national consultations, which culminated in the introduction of the Pensions Act 2008. From October 2012, employers across the country will be bliged to automatically enrol their staff into a pension scheme.
"It is in black and white: from 2012, employers across the country will, by law, be required to provide and contribute to pensions for their staff," says Mike Cherry, the FSB's pensions spokesman.
With employer contributions set at three per cent (employees will contribute four per cent, the government one per cent), the reforms are expected to add a significant amount to wage bills.
Evidence collected by the FSB shows that currently the majority of small employers 87 per cent of micro businesses, for example - do not operate occupational pension schemes at all. So, this reform not only represents a significant financial burden, it will also involve a lot of administration.
A simple, low-cost pension scheme, NEST (National Employment Savings Trust), will be launched in 2011 meet the needs of low to medium earners and their 'employers. It will be one of the schemes employers can use to fulfil their duties under the reforms.
While the FSB is in full support of moves to confront the pensions crisis, it is also concerned that the systems in place are overly complicated and is working hard to make them as simple as possible.

The message is clear: the reforms are coming, they will affect every business that employs people, so make sure you are prepared.
"First of all factor in the costs of these reforms into your long-term projections," says Cherry. "Read up on what exactly is required and also start to think about which provider to go with - there won't be a default pension scheme rolled out across the board - it's up to employers to make an informed decision."
"The legislation has gone through Parliament," says Cherry. "All our efforts are now being put into making sure that the operational side of these reforms is simple and straightforward."
Source: The Magazine of the Federation of Small Businesses FIRST VOICE OF BUSINESS
FSB

PENSION REFORMS: THE BASICS
~ Employees between
22 years old and state pension age earning more than £5,035 must be automatically enrolled.
~ Enrolment will be phased in over a period of time, starting with large employers, then medium and then small.
~ Employer contribution levels will be phased in gradually, starting at one per cent, then two per cent, .and finally three per cent. The jobholder's contribution will be
phased in during the same period.
~ Employers will be able to choose the pension scheme(s) they want
to use, provided the scheme(s) meet certain quality criteria.
~ The Pensions Regulator will be writing to all employers one year, and again three months, in advance of their automatic enrolment start date, detailing how to comply.

For more information about the pensions reforms, visit Department for Work and Pensions




Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk