The U.K. Ggovernment’s announcement that beginning April 2011, the value of tax relief will be tapered away for those earning over more than £150,000, and will fall to 20% for those earning more than over £180,000 opens a host of questions, according to Watson Wyatt Worldwide.
“With the government borrowing £125 billion more this year and next than it predicted five months ago, it has had to look for some revenue-raising measures in a hurry without thinking through the details,” says John Ball, head of defined benefit (DB) pension consulting at with Watson Wyatt Worldwide. “The easy bit is announcing that they will restrict tax relief for higher earners from 2011. The hard bit is working out how to compare the value of defined benefit pension promises.”
Watson Wyatt has eight questions for the government:
1. How do you measure defined benefit DB accruals? The restriction of tax relief applies to “all contributions, including employers.” In defined benefit (DB) schemes, however, it is the benefits accrued, not the employer contributions paid, that benefit the employee.
2. Will the £150,000 and £180,000 limits be indexed? If these thresholds do not rise over time, progressively more people will be affected.
3. How will the tapering work? Does earning slightly over more than £150,000 reduce the rate of tax relief available on all pension contributions or only on those contributions paid out of gross income in excess of £150,000?
4. How will employers and individuals administer this?
5. How will behaviour change? If some people will get 20% tax relief on the way in and pay 40% tax on the way out, it could be more tax-efficient for them to save in other ways. If so, how has the Treasury accounted for behavioural changes in estimating how much money it will raise?
6. Where does this leave the lifetime and annual allowances? If in the future high earners in future find saving in a pension less attractive than saving in other ways, how likely is it that people will run up against the annual allowance and lifetime allowance based on future savings?
7. Will this affect executives’ commitment to pension provision?
8. Who are the victims of the transitional arrangements? Some high earners who have recently lost their jobs will consider waiving severance or redundancy payments to increase their retirement benefits. Since the “regular” savings that can receive the full 40% relief between now and 2011 are only those made quarterly or more often, such a waiver could now incur a tax charge.
To comment on this story, contact us.