George Osborne announced on 5 December that the annual pension allowance on which people receive tax relief will be cut from £50,000 to £40,000 and the lifetime allowance will fall from £1.5 million to £1.25 million from 6 April 2014.
Jackie Holmes, senior consultant at Towers Watson, said: “Previously, the allowance’s impact was seen as being on senior staff, but now middle management might be hit.”
Charles Cowling, managing director at JLT Pension Capital Strategies, added: “If an employee is on a salary of £40,000 and has accrued 30 years’ service and a pension of £20,000, it will only take a 10% pay rise for the employee to fall foul of the annual allowance.”
Younger staff are likely to be hit hard, especially if the lifetime allowance continues to fall.
Simon Massey, tax partner at Menzies, said the lifetime allowance is unlikely to go up again for at least five years and younger employees could be hit when they come to retire. “A saver in their 20s or 30s could, with the impact of inflation and the growth in their pension fund, find that even a modest fund could get to that lifetime level by the time they retire,” he said. “This is a perfect example of fiscal drag.”
Nigel Roth, senior partner at Mercer, said those nearing retirement should consider that lump sums and payments following redundancy, for example, could push them over the annual limits.
He added: “Some organisations, particularly in the private sector, that have reluctantly kept their DB scheme after the last round of pension changes, might now see that a lot more people could be affected by the latest changes.
“It is conceivable that these employers might undertake a more comprehensive overhaul of their pension arrangements.”
Chancellor’s Autumn Statement 2012
- Higher-rate income tax threshold rises 1% to £41,865 in 2014-15, and 1% to £42,285 in 2015-16.
- Annual exempt amount for capital gains tax (CGT) rises 1% to £10,706 for 2014-15 and 1% to £11,100 for 2015-16.
- Tax-free personal allowance up £235 to £9,440 for 2013-2014.
- Pension tax relief: Lifetime allowance reduced to £1.25 million and annual allowance reduced to £40,000 from 6 April 2014.
- Capped drawdown limit increases from 100% to 120%.
- CGT exemption on employee shareholder shares up to £50,000 from April 2013.
