FINAL SALARY RETIREMENT INCOME COULD BE CUT BY A THIRD AS A RESULT OF PROPOSED PENSION TAX CHANGES

02 August 2010

The impact on high earners in defined-benefit schemes (such as those which provide a pension based on final salary) could be magnified because the government will also review how the promise of an annual retirement income counts towards this cap.

Mick Calvert, a senior consultant at Towers Watson, said: "The maximum pension that can be built up in a tax-advantaged final-salary scheme could be cut from £90,000 a year to £60,000 a year. That would be the result if the government decided that each pound of annual income was worth £25 instead of £20 at the same time as shaving £300,000 off the Lifetime Allowance."

HM Treasury says the revenue raised by reducing the Lifetime Allowance could allow it to ‘index’ the Annual Allowance from an unspecified future date, which it hints would be no earlier than 2015. The Annual Allowance caps the amount that can be saved in a tax-advantaged pension each year, and the Budget proposed reducing this from £255,000 to between £30,000 and £45,000. Without indexation, inflation would eat into the real value of the Annual Allowance, leading to further real terms cuts each year. Read more....