Chancellor's 'radical' plans may mean tax breaks for employees

The government is believed to be planning a major overhaul of the tax regime that applies to pensions which could help employees boost their retirement income through more generous tax breaks.

At present, members of company schemes can only invest up to 15% of their annual salary into their pension. This can leave those who have regularly swopped employers, had employment breaks, jobs without pensions or chosen to retire early with substantial shortfalls when they come to retire.

These limits compare to the more generous tax-free breaks on offer to the self-employed and those paying into personal pensions, who were considered to need more help from the taxman as no employer was helping to boost the pension with company contributions. Such savers can put 17.5% of their annual earnings aside into a pension, rising in steps with age, up to 40% above 61.

However, with the collapse of many final salary arrangements, and tumbling share prices for those in investment linked company schemes, occupational pensions are no longer the worry-free zone they once were. Employees are likely to need just as much help from the taxman as anyone else.

The pensions industry has been calling for a harmonisation in the tax treatment of company and personal provision, and believes "by reading the Chancellor's lips" when he delivered his pre-budget report on Wednesday, that they can detect signs such a move may well be on the cards.

And they believe that any such move might call into question the Chancellor's other statement, that there would be no cutback to the treatment of tax-free lump sums.

Brown said a "radical" overhaul of the tax regime as it applies to pensions would be announced on December 17, when the government takes the wrappers off its long-awaited pensions green paper.

Experts are becoming increasingly convinced that the present 15% limit on any annual employee contributions into company schemes will be removed, and replaced with a much more generous ceiling, which will also apply to those saving via stakeholder and personal plans.

This would inevitably have implications for the amount of cash which can be taken tax-free. Currently those in a company scheme can take cash equivalent to one-and-a-half times their final salary, whereas those with personal pensions can take a quarter of their pot as cash.

The expectation is that after the introduction of a single tax regime, one of these options would disappear.

Stewart Richie, director of pensions at Scottish Equitable commented after hearing the statement: "In the pre-budget statement the Chancellor went out of his way to use the word 'radical' when describing the proposals which we will get from the Inland Revenue and which are due to be published on December 17.

"He didn't have to use the word radical, but it has given an indication that we may be moving to a single tax regime, not just for new pension savers, but for existing ones."

The current regime is highly complex, and for this reason Alan Pickering was commissioned to look at ways of making them easier to understand and operate by removing the many onerous obstacles to encouraging and administering pension saving.

There are a myriad of rules and regulations. Company employees earning less than (pounds) 30,000, for example, can invest the full 15% annual salary plus an extra (pounds) 3600 in a stakeholder pension.

Furthermore, employers resent having to routinely check whether all employees are exceeding their contribution limits, and the expectation is that a much higher ceiling will do away with the need for this exercise. However, concern about highly paid fat cats feathering their nests makes it rather unlikely that the ceiling would be scrapped altogether.

Politically such a move could look smart, not least because it would allow the government some defence from the blame for the current crisis being hurled in its direction due to the cutbacks to pension fund tax reliefs and concern over an aging population with less provision for old age.

They could be seen to extend tax breaks in a way which may not cost them much. In reality, the ceilings are rarely a problem because, except as they approach retirement, the majority of employees don't come anywhere near them.

In future most people will have investment-linked pensions, very similar to the ones enjoyed by those with personal pensions. Employers are cutting back their contribution levels, which mean that employees will need to save more. Furthermore, tumbling stock markets, combined with a more subdued outlook for equities, means more money will need to be put by to provide an adequate pension.

The rules governing pension contribution levels are complex and seen as a deterrent to some people.

Norwich Union's pensions director Jerry Barnfield said: "It has to be recognised that different limits is an added complication for advisers, providers and the public. There is no longer any reason for them to be different. Aligning them would make it simpler for everyone. But any alignment must not result in the amount people can contribute being cut. We want people to save more not less."

Copyright 2002 SMG Sunday Newspapers Ltd.
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