Changes to annual allowance will result in lack of faith in pensions

The majority of employers, trustees and high earners prefer the government’s plans to changing the annual allowance instead of reducing pensions tax relief for higher rate taxpayers but many fear the move will lead to a lack of faith in pensions.

Of the 100 respondents to research conducted by Punter Southall, 60% said a reduced annual allowance is preferable than a reduction of tax relief for those earning more than £130,000. However, three quarters of respondents believe the move will reduce the overall level of provision for individuals and around 50% believe the changes will reduce trust in pensions.

The majority (82%) of respondents said the proposals will increase the number of queries they receive, with 67% expecting to encounter problems if they need to ensure the pension scheme pays the tax charge and reduces the member’s benefits accordingly.

Meanwhile, there is a broad consensus that inflationary increases on benefits should not lead to a charge, with 69% of respondents agreeing with this and 16% not minding either way.

However, opinion is divided about some features of the new annual allowance charge with views split fairly evenly between whether the defined benefit (DB) valuation factors should be flat or age related when testing against the charge. 

In addition, 40% believe individuals should be exempt form the charge in the year of retirement, while 28% wanting the exemption to remain.

Mike Richardson, senior consultant and chair of the taxation technical group at Punter Southall, said: “It is pleasing the government has listened to the pensions industry. The reduced annual allowance approach means that saving in a pension remains a viable option for all individuals, including those on higher incomes, and leaves senior executives engaged in the pension schemes they provide for their employees. 

“An annual allowance approach should be a much easier system for pension schemes to implement and would avoid the cliff-edges that were innate under the high income excess relief charge.”

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