Aon Hewitt has welcomed the UK Government’s proposals for changes to pensions taxation which favour “simplicity over accuracy”.
Tony Baily, principal consultant at Aon Hewitt, said: “We are pleased that the Government has listened and responded to some of the industry concerns. Given the limited time for the changes to be implemented, as simple a regime as possible was called for and the Government has responded to this in its proposals.
“The higher than previously proposed Annual Allowance and a relatively low valuation factor mean that the winners are long-serving, middle-income earners in defined benefit plans, many of whom will now not be affected by the Annual Allowance. The losers are high pension savers who get caught by the reduced and frozen Lifetime Allowance.”
Tony Baily continued: “Our survey this summer of over 150 pension managers revealed concerns that the new regime, as it was initially outlined, could penalise those who retired on grounds of ill-health or those who experienced a ‘spike’ in the value of their benefits, for example as a result of a pay rise.
“Today’s proposals offer an exemption for ill-health retirees and the ability to carry forward unused allowances for up to three years to deal with these ‘spikes’. They may also open the way for a more structured approach to pension planning for many individuals.”
However, Aon Hewitt cautioned that the levels of the allowances announced today would need to be kept under regular review to avoid a pensions version of “fiscal drag”.
Tony Baily said: “If the reduced Lifetime Allowance is frozen at its initial level, many middle-income individuals will find that it becomes a real issue for them. They may be pleased not to be caught by the Annual Allowance but they may well be caught again by additional taxation before long. Longer-term planning for pension is needed but the outlook is much less clear.”
Even if the reduction in the Lifetime Allowance is deferred until April 2012 (and this cannot be relied on), for the majority of the other proposals there is less than six months for individuals, employers and their pension schemes to prepare for the changes. Aon Hewitt thinks this will be a challenge.
June Grant, principal consultant at Aon Hewitt, suggested a three-point call to action: “Pension schemes and their administrators will need to revise their systems to cope with these changes. There is much to be done, although we do welcome the Government’s decision not to force plans to align their pension input periods with the tax year, as this would have brought yet more complexity.
“Now more than ever it’s important for individuals to plan their own finances. They will need to gather together all their historic pension information – some of which will not have been looked at for many years – to deal with the reduced Lifetime Allowance.”
June Grant continued: “Most importantly, employers will first need to identify which employees are affected now and which further ahead. They will then need to revisit their reward strategies to decide whether those senior people should be allowed to select alternative compensation or, where available, other approaches to pensions for retirement saving to avoid paying double tax.
“Employers do not have long to decide on their approach and then to communicate it so that key staff can make informed decisions ahead of April.”
Source : Aon Press Release