UK - The UK government has introduced a series of reforms which are designed to improve employees' access to tax-free pensions cash and post-retirement income but which could also impact the future returns for pension funds on private equity investments.
Treasury minister Alistair Darling announced in yesterday's Pre-Budget Report taper relief is being abolished and a flat rate capital gains tax (CGT) of 18% is being introduced which will also be applied to private equity investments, in a bid to improve the transparency of private equity.
There has been a row in the UK about the tax advantages to private equity in recent months about the so-called ‘carry' rate on CGT which allows private equity investors to pay just 10% CGT if they holding their investment for two years or more.
That benefit has now been scrapped and the move has drawn fire from the British Venture Capital Association - the organisation largely caught up in the recent row of taxation.
Simon Walker, chief executive designate of the BVCA, claimed increasing the CGT rate payable by private equity firms would hit not just the large firms and investors but those receiving the money.
Moreover, he noted the CGT rate is now higher than that seen elsewhere in Europe, and will hit investors, including pension funds.
"We are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate no matter how long they have been held," said Walker.
"This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18% means capital gains tax is higher in Britain than France (16%), Italy (12.5%) or the US (15%) - let alone countries like Switzerland which have no CGT."
He continued: "The British private equity industry - which accounts for 60% of the European [wholesale] market - is core to maintaining London as the world's financial capital. We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognized for the contribution it makes to pension funds and the wider economy. Above all private equity and venture capital need certainty and stability."
Elsewhere within the PBR, however, there was some good news for pensioners and defined benefit schemes as reforms are being introduced to simplify the rules under which tax-free cash can be taken at retirement.
The calculation used to assess standard tax-free lump sum entitlements is now being simplified to the benefit of defined benefit pension schemes.
From A-Day - the label given to April 6 2006 when ‘pensions simplification' came into force - individuals in defined benefit schemes were able to take up to 25% of their pensions as a tax-free sum, however in cases where the scheme entitled them to receive more individuals could protect this amount as long as it is paid with anything else built up after A-Day.
However, it was pointed out to the Department for Work and Pensions the process of protecting and paying out this extra amount was complex, so the DWP has softened the need to build additional post A-Day funds and those who took their benefits before A-Day can now claim additional tax-free cash.
At the same time, the Treasury has issued a two-page document suggesting the Financial Services Authority will be required to do more to ensure consumers buying annuities are fully aware of their right to use the Open Market Option. Under the OMO, retirees are no longer required to buy an annuity only from their pre-retirement pension provider but can shop around for the best possible income at retirement.