UK - The simplification aspects of the proposed pension tax changes announced by the Treasury this week have been welcomed by international consultants Mercers. They are a success for Gordon Brown, Chancellor of the Exchequer, says Paul Greenwood, who heads retirement research at the consultants in London.

"But the report neglects the most important issue – that the billions taken away from schemes in recent years should be returned in meaningful incentives for employers and individuals to save more for retirement," he says, referring to the five billion pounds (eight billion euros) per annum the UK Exchequer is estimated to have cost pension funds by the taxing of dividend income.

At Watson Wyatt, Colin Singer, partner of the consultancy firm, says: "Everyone serious about pensions will applaud a single streamlined regime."
Earlier attempts to simplify had failed due to the ring fencing of existing rights and expectations.
"These proposals differ because although they seek to protect the value of accrued rights, they do not preserve the ability to continue to make pension savings on the original basis."

Under the proposals, the Inland Revenue aims to introduce the new regime in 2004, which would bring all of the UK’s approved pensions under a single tax regime. People will be able to contribute to all types of arrangements they wish to at the same time, but there will be an overall annual limit of £200,000 on inflows to an individual’s pension on which full tax relief will be granted. A lifetime limit will apply to the amount of pension savings totalling £1.4m, which can benefit from tax relief.

Singer at Watsons points out that the valuation of defined benefit accrual is key to the success of the new regime. "Using standard actuarial factors may appear consistent with a simple approach, but unless the valuation factors produce a ‘’fund’ no greater than the scheme-specific valuation (or cash equivalent), the notional conversion to defined contribution envisaged by the Revenue may prove to be a real conversion."

Mercers’ Greenwood comments: "The new lifetime limit for tax effective savings is only indexed to prices, not to earnings plus longevity. "This has to be kept under review in case it becomes a significant constraint."