Budget freedom ‘will increase cost of tax relief’ – LCP

The Budget freedoms will increase the cost of tax relief to the Government because people will pay more into pensions, accelerating the likelihood of sweeping tax reforms says LCP.

The consultancy says a £40,000 contribution for a 45-year-old executive could be worth anything from £31,000 to £62,000, net of tax at age 60, depending on the policies of the next Government.

LCP’s 2014 executive pensions survey found the gap in pension compensation between FTSE100 bosses and their FTSE250 counterparts is growing fast. FTSE100 execs now receive pension compensation of 30 per cent of pay, compared to 25 per cent in 2011. FTSE250 executives’ pension remuneration meanwhile has remained static at 20 per cent.

The survey confirms that companies are continuing to move towards flexible forms of pension compensation, such as cash in lieu of pensions, defined contribution pensions, or a combination of both, allowing flexibility under the reduced annual and lifetime limits on tax relievable pension savings. The proportion of executives whose sole form of pension provision is a taxable cash allowance in lieu of pension has more than doubled from 11 per cent in 2012 to 25 per cent in 2014.

LCP predicts executives will respond to the Budget pension reforms by making more use of DC schemes, thereby increasing the cost of delivering tax relief.

LCP partner and report author Mark Jackson says: “Tax relief on pension contributions costs the Treasury £28bn each year. If pension saving has indeed become more attractive then this cost will increase. In our opinion, further change to the tax regime for pensions is inevitable. This will have the greatest impact on the population covered by our survey, and extend beyond that to any higher rate tax payer.

“Pension saving will go up and the cost of tax relief to the Treasury will go up.  As a result, we expect more change to tax relief on pensions from whoever forms a Government in 2015.”