UK - Pension officials have warned a decision by the UK government to freeze the lifetime and annual allowance for pension contributions, announced yesterday in the Pre-Budget Report (PBR), will introduce an "element of uncertainty in long-term pension planning" for both high and low earners.
Alistair Darling, chancellor of the Exchequer, stated in his Pre-Budget speech in the House of Commons: "I intend to maintain the ceiling on tax relief given to people with pension funds up to £1.8m, until and including 2015/16".
The Lifetime Allowance (LTA) and annual allowance (AA) was introduced in 2006 as part of the government's pensions simplification programme, and was designed to place a cap on the tax-relief of pension savings - after which point income would be taxed at 55% instead of 40% - and was set at £1.5m in April 2006 with annual increases until it reached £1.8m in 2010-11.
Meanwhile, the annual allowance - the maximum amount of contributions for which members can receive tax relief in one year - was initially set at £215,000 in 2006 and will reach £255,000 in 2010-11, however both limits will now be frozen for five years until 2015-16.
Marc Hommel, partner and UK pensions leader at PricewaterhouseCoopers (PwC), pointed out the allowance also affects benefits accrued under pension tax regimes earlier than 2006, which members may have safeguarded with enhanced protection.
Enhanced protection allows members to protect accrued benefits that already exceed the LTA, or may exceed the LTA applicable when they retire, from triggering a 55% tax charge, on the condition that no more contributions are made.
He warned in many cases the maximum level of protected benefits an individual could receive without triggering a tax penalty is linked to the annual increase in the LTA, so it "will therefore be frozen too".
Hommel said: "Although the Treasury had never promised indexation, it was hoped the allowances would continue to increase at least in line with price inflation."
Tom McPhail, head of pensions research at Hargreaves Lansdown, also said: "We are particularly disappointed with the freezing of the LTA as it now introduces the spectre of a 55% tax charge for workers who have done the right thing and saved hard for their own retirement."
He added the move would introduce an "element of uncertainty into long term pension planning", and warned investors with relatively modest pension pots could suffer from this, while the decision "will also have the effect of freezing any increases to the trivial commutation limit" - which is 1% of the lifetime allowance - making it "bad news for low earners too".
Meanwhile, Karen Goldschmidt, partner at Lane Clark & Peacock (LCP), suggested the surprise decision "reduces all expectations for tax relief for pensions savings and sets a worrying precedent for the future".
She warned while it may look as if the decision only impacts the highest earners, middle-earners will also have to take it into account in planning their pension provision, as Goldschmidt claimed "this stealth tax could ultimately have the same impact as removing higher rate income tax relief on pension contributions".
David Seaton, director of Rowanmoor Pensions, claimed the decision is a "disaster for pensions" as it will reduce the overall level of pension funding in the UK.
He suggested the announcement means more people will need to consider applying for enhanced protection, as "a current fund of £1.2m and an investment return of 6% per annum for the next seven years means the lifetime allowance will be reached by 2016".
He also warned an increase in the number of people applying for enhanced protection "will reduce pension funding for the future as any further contributions will mean protection is lost".
"The retrospective attack on pension funds could well be seen as a disincentive to save in pensions. It must be an essential part of any sensible pensions' policy that to provide stability and give confidence in saving, the rules do not constantly change," added Seaton.
However Standard Life, suggested the additional PBR measure of increasing income tax to 45% for those earning over £150,000 a year from 2011, could mean some members would still be better off saving in a pension.
Andrew Tully, senior pensions policy manager at Standard Life, said: "Although this reduces the real value of the tax efficient pension saving, people may still want to save more than £1.8m and pay the 55% tax charge. In some cases, this will be better than saving through a net fund investment such as a unit trust or OEIC, particularly for those paying 45% income tax in future."
Hommel added: "Assuming that pensions' tax relief will be available at 45%, individuals with annual taxable income over £150,000 could benefit from timing their pension contributions to minimise the contributions that receive 40% tax relief and maximise those that receive 45% tax relief."
He said this could mean delaying contributions for the remainder of this tax year and the next two, although he admitted this could be limited to individuals who are able to use their annual allowance to the maximum extent.
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