Reaction to the 2012 Budget from the pensions industry
Robin Hames, head of technical, marketing and research, Bluefin: “The Treasury has announced plans to close a loophole which has been heavily promoted by some audit and tax consultancies, in which employees use salary sacrifice to fund family members’ pensions.
“Under the arrangement a higher rate taxpayer can sacrifice some of their income, and the employer will make commensurate contributions into a family member’s personal pension – regardless of whether they are an employee of the firm or not. The individual sacrificing their salary effectively receives full tax and National Insurance relief, with the employer also making an NI saving. This arrangement has been heavily promoted to high net worth individuals following previous reductions in the annual allowance for pension contributions.
“We’ve been aware of this arrangement being promoted by some firms for a while, and have never felt happy about it. We also know that many providers have felt uncomfortable accepting pension contributions from an employer not related to the personal pension policy holder.
“Like all such wheezes, this arrangement doesn’t actually breach any pieces of legislation but it’s not compatible with their overall intent. It is an example of following the letter of the law, but not its spirit. The Chancellor has made clear his views on avoidance.”
John Lawson, head of pension policy at Standard Life: “This tax ’idea’ has been circulating in the industry for a few months. And it involves employees sacrificing salary or bonus and their employer paying this into the employees’ spouse’s pension up to the annual allowance, including carry forward. We have not been promoting this as we viewed it as aggressive tax planning. We are not surprised that the Government has moved to close this loophole and support its move to do it.”
Rob Thomas, associate at Barnett Waddingham: “Removing child benefit in 2013 may have unintended consequences through creating a ‘sweet spot’ for some high earners who wish to make pension contributions via salary sacrifice.
“A person earning £62,000 paying a personal gross contribution of £5,000 per year on a non-salary sacrifice basis loses child benefit.
“Meanwhile, if the same person were to sacrifice £5,000 of salary to have a reduced salary of £57,000, they would retain some of their child benefit and their employer pays a pension contribution of £5,000 into the individual’s pension plan. The individual also has a very tiny increase in take home pay due to NI savings and the employer is happy because of the savings he makes on the amount of sacrificed contribution.
“People earning between £50,000 to £60,000 should also consider payment of pension contributions via salary sacrifice as the child benefit reduces by 1% for each £100 earned above £50,000 until it is completely gone for people earning £60,000 or more.”
Raised income tax personal allowance
Dr Deborah Cooper, partner at Mercer: “While increasing individuals’ income tax allowance seems great in isolation, it will have possibly unintended consequences for those low-earners who no longer have to pay tax, but are members of occupational schemes, since they will no longer get tax relief on their contributions. This will make auto-enrolment possibly a harder sell to this group. It also exacerbates unfairness created by differences in the tax treatment of member contributions between personal pensions, where relief will still be available, and most occupational schemes.”
Tony Baily, head of the pensions tax team at Aon Hewitt: “The Chancellor’s commitment to increasing the personal income tax allowance to over £9,000 by April 2013 could reduce the number of employees eligible for auto-enrolment, saving companies up to £100m each year in pension contributions. This will be welcome news for UK businesses that are already struggling to come to terms with the burden of auto-enrolment.”
Simplification of age-related allowance / ‘Granny tax’
Joanne Segars, chief executive, NAPF: “It is pensioners who are the biggest losers in today’s Budget. Over the course of this parliament pensioners stand to lose over £2bn in age-related tax allowance. This will come as a blow to millions of pensioners who have paid in to the tax system throughout their working lives.
“Pensioners with modest amounts of pension saving stand to be the biggest losers.”
Brendan Barber, general secretary, TUC: “The Chancellor’s decision to raise more than a billion extra pounds in tax from pensioners by freezing age-allowances will come back to haunt him. It’s already being dubbed ‘the granny tax’.
“Pretending that pensioners will be grateful because it will simplify their tax is a vain hope. Instead they will see that they are being asked to pay more while the super-rich have kept all the pensions tax relief – a heavy burden for ordinary taxpayers.”
Nigel Roth, Senior Partner and Tax Specialist at Mercer: “With phasing out of the age-related annual allowances those still in work will find that when they come to retire, they are paying more of their pensions in income tax. In contrast, those who were born before 1948, or have already retired, will have their allowances retained.”
Gregg McClymont MP, Labour shadow pensions minister: “The Conservative-led government has tried to bury its £3 billion raid on pensioners incomes over the next four years. The freeze in the personal allowance for pensioners will see 4.4 million pensioners who pay income tax losing an average of £83 per year next April. And people turning 65 next year will lose up to £322.
Pension tax relief
Tony Baily, head of the pensions tax team at Aon Hewitt: “Despite persistent rumours the Chancellor has resisted the temptation to meddle with pension tax relief. This gives individuals the opportunity to take advantage of 50 per cent relief on their pension savings before it drops to 45 per cent from April 2013. Individuals should look carefully at their personal position if they want to maximise their tax efficient saving. In the extreme case, an individual could potentially make up to £300,000 of pension savings before April 2013, creating an extra £15,000 of tax relief.
Jamie Jenkins, head of workplace strategy at Standard Life: “The Budget is good for pensions and increases the chances of auto-enrolment succeeding. With no changes to pensions tax relief, this valuable incentive will continue to encourage people to save.”
Joanne Segars, chief executive at the NAPF: “We are pleased that the Government has listened to the NAPF and others in the pensions industry and has resisted the temptation to tinker with tax rules for pensions. Such a move would have further undermined confidence in pensions on the eve of the introduction of auto-enrolment which should bring the benefits of pension saving to 8 million working people.”