• Share
•  Delicious
•  Digg
•  Facebook
•  LinkedIn
•  Reddit
•  Twitter

Contact: Alistair Peck
Tel: +44 20 7178 3143

			E-mail this page				Print this page

United Kingdom
London, 28 July 2010

• A stripped down Annual Allowance system must not tax individuals unfairly on past service or key events such as redundancy or early retirement.

Mercer has welcomed the Coalition Government's decision to rethink the restriction of higher rate tax relief as a welcome boost to engagement in private Defined Benefit (DB) pension provision but has noted the importance of rules governing the Annual Allowance (AA).

The consultancy is fully supportive of the Government’s proposal that the existing system of AA might accommodate the restriction of higher rate tax relief. However, Mercer noted that the government must be careful how it introduces rules to deal with events that a 'core' AA system might miss or tax unfairly - for example, past service, early retirement and redundancies.

According to Eleanor Dowling, a Principal in Mercer’s regulatory group, “A lower AA is likely to be an effective way of meeting the Government's aims of increasing fairness within the pensions tax regime without introducing more complexity. The AA sits within the current system and its use is less likely to require material intervention to pension administration systems.

“If implemented thoughtfully this approach of amending the existing tax-relieved contribution limits will result in most people falling outside the system. Careful consideration needs to be given to how this is implemented, to ensure that the restriction in tax relief is not extended inadvertently to those on middle incomes,” she added. 

Mercer recognises that the Government needs to manage its debt, and that pension saving should not necessarily be exempt from this priority. It believes that there is a need for swift and decisive action to remove the uncertainty facing employers, savers and trustees. 

However, Ms Dowling added: “Rushing through pensions policy with the main intention of raising a certain amount of money for the public coffers is unwise; the government needs to think beyond revenue-raising to the impact the changes will have on ordinary pension savers.” 

Mercer believes that design of the factors used to value accrual for tax purposes during the year will be key to this, and deserves considerable thought. For example, if long-serving employees on middle incomes are promoted and receive large pay rises, this may result in a substantial increase in the value of their benefits in the company’s final salary pension scheme. This could mean very large tax bills for the employees, though they are not high earners. Similarly, rules governing events such as early retirement and redundancy must treat individuals fairly.

Mercer believes that marginal tax relief should be retained, and that the only limits to this should be imposed via the AA and Lifetime Allowance (LTA). Introducing other limits to tax relief will be unproductive and likely to result in unintended consequences.

The consultancy also questioned the prioritisation of the same amount of financial "yield" that was identified by the Labour Government, over and above more fundamental concerns of ensuring a fair and simple tax regime, particularly in the context of the recent creation of the Office of Tax Simplification by the Coalition Government. 

Mercer believes that policy on restriction of pensions tax relief must form part of a framework to engage savers.

“Disillusioned ordinary people on middle incomes need incentives to put their money into pensions, not further roadblocks. We hope that the Government has realised it must avoid tinkering too much with the current pensions tax regime to avoid alienating pension stakeholders,” concluded Ms Dowling.

E-mail this page

Print this page

Contact: Alistair Peck
Mercer Press Office
Tel: +44 20 7178 3143