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UK Government Moots New Measures To Simplify Pensions Tax System

by Jason Gorringe,, London

12 December 2003

The UK government has published a second consultation document on improving the taxation regime in the pensions sector, which contains proposals to simplify the system in response to suggestions made in the first high-level consultation in December 2002.

This second consultation document sets out how the simplified regime would work if introduced, and proposes a number of modifications following the consultation, including:

- reducing the rate of the recovery charge from 33.33% to 25% where people exceed the lifetime allowance;

- a single, fair and reasonable factor for valuing defined benefits against the lifetime allowance – 20:1 at all ages;

- the ability to take funds above the lifetime allowance as lump sums, once the recovery charge has been applied;

- more generous transitional arrangements designed to ensure that there is no retrospection – either real or perceived – on contributions and service made or accrued before the simplified regime is introduced; and

- confirmation that unapproved, unfunded arrangements will be allowed, so employers will have a choice whether to offer unlimited pensions within or without the tax-privileged regime.

The government claims the reforms were "never intended to raise revenue" and in fact with the proposed modifications, they would carry a modest cost to the Exchequer.

By removing the “existing plethora of controls" the new proposals will make pensions "easier to understand and cheaper to operate, which should benefit everyone,” the government says.

According to the proposals, the key benefits of the simplified pensions regime, if it is introduced, would be that:

• almost 15 million people will be able to save for their future pension without interference from artificial tax rules;

• people will benefit from the lower charges associated with reduced administration costs;

• financial advice will be straightforward and based on need, not efforts to exploit arbitrary tax differences between the various pension regimes;

• it will no longer be necessary to leave employment in order to access an employer’s occupational pension. This means that advisers will not need to encourage people to transfer from an occupational scheme to a personal pension to obtain a pension while still working;

• it will no longer be necessary to choose between membership of a personal pension and an occupational pension. Anyone will be able to join any type and any number of pension schemes at any time;

• all occupational schemes will be able to pay a lump sum of up to 25% of the value of the benefits;

• the maximum permissible tax free lump sum for all those earning more than £100,000 a year in the 1987 and 1989 occupational regimes rises from £150,000 to £350,000;

• people will not need to consider whether to transfer to obtain tax advantages specific to a personal pension;

• all those in the 1989 regime earning more than £100,000 will have more flexibility to make tax relieved contributions and will no longer be restricted to pensioning only part of their salary;

• those on more modest earnings who leave their pension saving late will not find that they are restricted in the amount of extra contributions they can make each year; and

• the labour market distortion that makes people reluctant to move jobs because doing so might mean a change to a less generous pensions tax regime will be removed.

Unlike the current complex and inflexible system, which sets an absolute limit on pensions and/or contributions, the simplified regime would have one key feature:

• a single lifetime allowance for the level of tax-privileged pension saving (£1.4 million, indexed annually).

The National Audit Office will report in advance of Budget 2004, in order to allow an announcement to be made in the Budget on whether or not the Government will introduce the simplified regime. If it is decided to proceed, the measures will be in the 2004 Finance Bill and will be introduced in April 2005. Otherwise the current eight different regimes will remain in place.

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