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14 October 2010 - The Government today announced its proposals for the tax treatment of high earners in registered pension schemes.  Most of the announced changes are more generous to pension scheme members than the Government had trailed in July. For example:
  • the new annual allowance will be £50,000 (above the range of £30,000 to £45,000 suggested in July),
  • there will be full tax relief on all pension saving below that limit, and
  • members will be allowed to carry forwards any unused annual allowance left over from the three previous tax years, which means that members of final salary schemes are less likely to face a tax charge just because a pay rise leads to a one-off “spike” in their pension accrual in one tax year. 
The Government has also said that it intends to legislate to ensure that there is no tax charge when a member receives an enhanced pension on early retirement as a result of “major” ill-health – though exactly what this will mean remains to be seen. 

But the new arrangements will certainly increase the administrative burden on schemes, and defined benefit schemes in particular: from 2012, they will need to provide more information to members to help them work out their tax liability.

Employers who may have been thinking about ameliorating the impact on their high earners through unregistered pension saving arrangements have also been warned that they should think again.  According to today’s announcement, legislation will ensure that funded unregistered employer-financed retirement benefits schemes are less attractive than other forms of remuneration.

For some schemes and individuals, aspects of the new regime will come into effect immediately – though the newly-announced arrangements mean that in practice the impact will be felt only by those with very high current levels of pension saving.

Jonathan Moody, Partner in the Pensions Group at Mayer Brown said: “Under the new regime, it will never make sense for employers to offer pension accrual that takes people over the new annual allowance.  It’s a safe bet that pension schemes will change their benefit design to make sure that that never happens.  Employers will always have more tax-efficient ways to reward their employees.”

For further information:
John Thompson
PR Executive, London
+44 20 3130 8393