Register for updates

Sign up to get the latest BeeLines sent direct to your inbox. You can unsubscribe later if you wish.

Related links

BeeHive  >  Press Articles  >  Inequitable Compromise

Inequitable Compromise

I was pretty happy when I first heard of the compromise suggested by the Inland Revenue in its consultation paper of 10 December 2003 that final salary pension benefits should be valued at the rate of 20:1 at all ages when testing them against the lifetime allowance on pension savings.

It not only provided a neat way around the thorny question of the number of people affected by the limit, it also effectively means final salary scheme members will not really be limited to the GBP1.5m lifetime limit on pension savings when A-day finally comes around in April 2006.

The limit will still be there, of course, and lip service given to it, but, nudge nudge, wink wink, it won't really apply so there's no need to get worked up about it.

In practice, the use of this factor will mean that a final salary pension of GBP75,000 a year (with attaching ancillary benefits) can be provided for people and be deemed to be within the GBP1.5m limit, and therefore would not give rise to a tax penalty.

This will be the case even if the true cost of the pension benefits is much more than GBP1.5m. Given that people will still be allowed to retire from age 50 in 2006, the ability to 'value' the GBP75,000 pension with all the trimmings using the 20:1 factor at any age could be enormous.

That has to be good news to the millions of public sector and private sector employees in final salary pension schemes. However, while welcoming this simplification, I am concerned that people in money purchase pension schemes will have less scope for pension savings than their counterparts in final salary pension schemes.

In plain English, the proposals as they stand will mean people in some pension schemes will be able to save more for their pensions than people in other pension schemes.

This seems inequitable and is not really in the spirit of a single tax regime for pensions that government is attempting to put in place. Indeed, if I were a member of a money purchase scheme I would think I'd be pretty miffed about it.

This doesn't have to be where we end up. I suggest that those in money purchase pension schemes could be limited to a maximum fund of GBP1.5m, or to an amount that would provide an inflation-linked income stream of GBP75,000 a year (with corresponding ancillary benefits) if that is greater, to bring them into line with the pensions available to final-salary scheme members. That would do the trick.

The worry must be that if such a change is not implemented it will be the case in future that money purchase schemes will be inferior to final salary schemes.

Quite apart from being an arbitrarily unfair position, I am sure it would lead to distortions in the pension markets.

One likely outcome would be that small money purchase schemes, such as those currently configured as executive pension plans and small self-administered schemes under the current tax laws, would switch to a final salary basis to maximise the potential to make tax-efficient pension savings.

Such schemes would be highly unstable and in many ways inadvisable, but that is how the legislation currently proposed would drive people to take such unwise decisions.

There is only one sensible way forward for the government; they must create a level playing field for pension savers, irrespective of the type of pension scheme they are in.

Steve Bee

First published in Pensions Week, 5 April 2004