Advisors Urge Rethink On UK Pension Tax Changes

by Robert Lee, Tax-News.com, London

14 May 2009

Further consultation on the recently announced pension tax relief changes is needed to ensure that the ‘level playing field’ objective sought becomes the reality in practice, according to PricewaterhouseCoopers.

Alex Henderson, partner, PricewaterhouseCoopers LLP commented: “Further consultation on new pension proposals outlined by the government is the only way forward to ensure that in the attempt to achieve a level playing field, consideration of the fundamental ‘pensions deal’ proposition is upheld.”

Proposed changes announced could see a restriction to basic rate tax relief on pension contributions for those who receive a total annual income of GBP150,000 or more effective from April 22, 2009.

According to PwC, currently this is particularly likely to apply to those over this income threshold who are making non regular payments to their pension plans (i.e. less frequently than quarterly). Also, individuals whose total annual income sits within this threshold may not be exempt in times of unemployment. Furthermore, the firm points out that where a redundancy package may result in the individual exceeding the threshold income, then the use of a severance sacrifice into pension contributions will no longer be efficient.

The firm also points out that new joiners post April 22, 2009 may be much worse off than they would have been before budget day, especially where an individual has negotiated special contract terms.

PwC said that those in short-term high earning potential careers, such as sports men and women, who are often advised to use their earnings to support a high level of deductible pension contributions and fully fund their lifetime allowance as a matter of prudence, will find their ability to fund their retirement much restricted as a result of the budget.

Henderson added: “Although the proposed changes announced refer to those with total income in excess of GBP150,000, other employees may be keen to understand changes to pension tax rules. As a long-term investment there will be the worry that the limits could again be amended (immediately without the benefit of any consultation)."

“In addition, economic forces, such as inflation can affect pensions making them less attractive – not just for those who are above the cap, but the next tier down. Many employees will have seen their pension pots fall substantially and will be nervous about investing in equities while the continuing 0.5 base rate will keep rates on deposits low."

“The basic principle of a pension fund is that the individual entrusts money for an agreed period of time on the understanding that the return will provide for retirement - there is little confidence in putting money away now when there is such uncertainty about how valuable the deal will be.”

PwC warns that individuals will be held responsible by HM Revenue and Customs to account for any additional tax arising from the new proposals via their self assessment tax return.

According to private and corporate wealth advisors Towry Law, directors and key employees of small and medium-sized businesses are likely to be confused by the new pension rules.

Towry Law urges all directors and key employees earning in excess of GBP100,000 per annum to review their pension arrangements in light of the budget announcements.

John Richardson, Head of Technical Planning, Towry Law, said: “These new rules are complex and there is a real danger that directors and key employees of SMEs may not understand them. Anyone with annual income over GBP100,000 should take pension advice as a matter of priority. For example, some of these people may be able to benefit from effective tax relief of 60% when making a pension contribution."

“While the government has said that 2011 is when pension tax relief could be restricted, they have also introduced new rules which are designed to prevent effective tax planning ahead of this start date. So the wrong decisions made now will have an adverse effect on retirement planning."

“In many cases it is not clear whether people are affected by the new rules. So, as a first step, directors and key employees need to find out whether the new rules apply to them and if existing pension arrangements are protected."

“It is only when this is established that decisions can be made on whether to increase, retain or decrease pension contributions and if more focus needs to be given to other investments as part of an overall financial plan.”

Recommended