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A luke warm response from industry experts to Government's proposed pensions tax changes

In a bid to 'simplify' the pensions system, the Government has cut back on the amount of savings staff can pay into their pension pots before being taxed, but industry experts have welcomed the announcement as 'pragmatic'.

The tax-free amount is being reduced from £255,000 a year to just £50,000 from April 2011 and it is hoped this will save £4 billion a year.

George Bull, head of tax at Baker Tilly, said: "We welcome the clear statement from the financial secretary to the Treasury. After a period of considerable uncertainty, this clarification will provide peace of mind for many people trying to make adequate provision for their retirement income in a time of economic instability. Once the new limit is in force, we urge the Government to refrain from future tinkering in order that people can have confidence about their own pension planning."
But he added: "We still have concerns about how HMRC will deal with pension contributions paid on or before 5 April 2011.

Joanne Segars, chief executive of the National Association of Pension Funds, said: "Today’s announcement is a welcome and pragmatic approach that will help to ensure that saving through a pension remains tax incentivised.

"The increased Annual Allowance, three-year carry forward, exclusion of ill-health retirement and protection for deferred pensioners are sensible and helpful improvements to the earlier proposals.

"Increasing the annual allowance to £50,000 will help to ensure that modest earners with long periods of pensionable service are not caught with an unintended tax charge.

"It is important that these fundamental changes to the taxation of pensions remain focused on higher earners. Today’s announcement will help meet that objective."

And Marc Hommel, pensions partner at PricewaterhouseCoopers, added: "The new tax limits announced this morning are towards the less onerous end of the ranges previously suggested, and fewer people will be impacted than many feared. The current Government estimate is that 100,000 people will be affected but, as there is no current intention to increase the tax limits, many more people could be caught in future years particularly if inflation takes off.  

"The main unknown that will impact the extent to which people in defined-benefit pension schemes will face additional tax, is how inflation will be taken into account in looking at the amount of pension build-up in the year that is taxable. The document refers in an example to allowing indexation in line with Consumer Price Index but it is not clear whether this will be the rule or whether indexation will be dependent on specific rules of each pension scheme. Clarity is needed on this as soon as possible to enable employers to evaluate quickly how people in their workforce might be affected and to make the resulting policy and operational changes.

The Government has taken on board that many people faced with the new tax would struggle to pay it when due and have announced they will look at ways to mitigate the strain – for example, by enabling the tax to be paid by the pension scheme either immediately or at retirement. Additionally there will be flexibility to protect people who have a one-off spike in their pension in any one year (for example due to an exceptional pay rise or redundancy). We welcome this flexibility and hope that clarity on the final rules can be quickly forthcoming to enable employers and employees to plan accordingly."

A survey from Aon Hewitt found 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.

Tony Baily, principal consultant at Aon Hewitt, said: "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."

But he added: "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."