The Government appear to have come out stating their short-term intentions with pensions. In many senses the proposals almost revert back to pre-A-Day rules.

In short, (and I admit to not having yet seen a proper document on this, so please treat with caution) contributions towards pensions are capped at a value worth £50,000. As a direct result most of the population will not see any problem as most do not pay £50,000 into pensions.

Tax relief remains in place at your highest rate of tax. In essence basic rate (20%)is given automatically so £10,000 invested (gross) is a cheque for £8,000 (net) from the investor. Employers would pay the full gross £10,000 and treat this as an expense. Higher rate taxpayer reclaim the difference – another 20% or perhaps 30%) of the gross contribution. The way this is paid back to the taxpayer is to increase the level of income on which they pay 20% tax… thereby reducing the amount of income they pay 40% or 50% tax. Let me know if you would like a worked example.

However, the Government also seem to be reducing the lifetime allowance from £1.8m to £1.5m. This is frankly a very stupid thing to do and looks like playing to the media to me. It will hit people with large unprotected pension funds. The excess (above the allowance) is taxed at up to 85%. True, most people don’t have £1.8m in a pension pot, but some do. I also fail to see the logic in attacking a pension at both ends – where is the incentive to save?

Anyhow, I imagine that this rather daft measure will be altered wihtin a few years and perhaps won’t make much difference in the short term if the Government think investment returns are going sideways or negative… perhaps they know something after all..

Where this bites is for people in Defined Benefit schemes, the gold-plated pensions of yesteryear such as the NHS. I look after a lot of Consultant doctors that are now caught by this. As the amount paid to the NHS (for example) MUST be linked to salary and might be varied (by the employer) the payments to a defined benefit pension scheme are not calculated based upon how much is paid in, but in terms of what the extra year of membership is worth. If this were to increase by more than £3,125 for the year a tax charge would be levied against the member of the pension. This requires careful calculation. Consultants that suddenly find an increase in their pensionable pay (due to Awards etc) may find themselves caught out. So need the NHS to supply a Special Annual Allowance Statement. I won’t go into detail here.

What I’m reminded of is the pre-A-Day (06-04-2006) rules that restricted payments to pensions based upon age and the earnings cap (which we still have, though largely forgotten and irrelevant to most, now at £123,600). So the new £50,000 limit is almost bang on 40% of the earnings cap. You might remember this table

under 35 17.5%
36 – 45 20%
46 – 50 25%
51 – 55 30%
56 – 60 35%
61 or more 40%

So if it feels a little like rolling back the clock…. that’s because… well, it is.