Middle England relieved on pensions – KPMG

PENSION reforms should have middle England breathing a sigh of relief, a Birmingham expert has said.

David Fripp, head of pensions at KPMG in Birmingham, said the Government’s announcement heralded a fairer and more sustainable approach than had previously been the case.

“Critically it will help lower and middle earners maintain pension savings,” he said.
“The annual investment allowance has been set higher than first anticipated at £50,000.  Initially the government was looking at a level somewhere between £30,000 and £45,000.  

“The proposal to allow unused portions to be carried forward for three years will help people with irregular pensions savings patterns (such as entrepreneurs).  In calculating the annual allowance for defined benefits pensions accruals, the multiple has increased from 10 to 16 meaning that an increase in annual pensions benefit of £1,000 valued at £16,000 in terms of the annual allowance.”

He said the maximum lifetime allowance had been reduced from £1.8m to £1.5m with promises of transitional relief for those already above the new limit.  The multiplication factor used to calculate the lifetime value of a final salary entitlement remains unchanged at 20.

“The combined effect of these two new limits mean effectively that the maximum defined benefit entitlement an individual can have without breaching the limit is £75,000 (£1.5m divided by 20).  And the maximum pensions benefit that remains under the annual allowance would be £3,125 (£50,000 divided by 16), or around £9,000 over three years using the carry forward facility,” he added.

The exemptions for people retiring on the grounds of ill-health were welcome, added Mr Fripp, but may only apply for certain cases of major ill health.

Details of the ill health exemption are due by the end of the year and he said many would be watching closely to see what is and is not included.

“Whilst the highest earners with the largest pension benefits will feel a significant impact as a result of these changes, many across middle England will be relieved by (the) announcement.  All of us may be thinking that it could have been a lot worse,” said Mr Fripp.
 
“The real business issue now is how can employers respond and adapt their pension schemes to mitigate the impact of the reduced annual allowance.  Time is now pressing as the changes will apply in April 2011.  We expect most employers will be looking at this (now) as there are only five months to act.”

Paul Jones, Chartered Financial Planner at Black Country financial advisors Torquil Clark, said: “This move by the Treasury is a further step towards simplifying pensions and this point alone has to be welcomed. The Treasury have broken the link between earnings and the amount of tax relief available on contributions.

“For some high earners, this is good move. They will now be in a position to obtain full tax relief on contributions up to £50k per annum – more generous than the current rules allow.

“For other high earners, albeit consistently earning below £130k per annum, the move culls their, or their company’s if self-employed, potential annual pension contributions (earning tax relief) by £175,000.

“There are negatives which run deeper than the initial headline of the cuts being made.”