Middle earners on fresh pensions alert

Treasury reforms will affect more of us than on first glance, so review your retirement options, reports Alison Shepherd

The super-rich will not be the only people who will be affected by the Government's latest changes to pension tax rules, warn financial advisers.

Although the Treasury estimates that 100,000 of the country's highest earners, 80 per cent of whom earn more than £100,000, may now have to adjust their retirement plans, many others, earning far less, could be caught out by the changes, particularly if inflation continues to rise.

These people include middle earners who are in a final-salary scheme, business owners who had planned to use their company assets to fund retirement and those whose income suddenly rises one year, due to such things as a legacy or a house sale.

Thursday's headline figures include a reduction in what can be saved tax-free into a pension from £255,000 to £50,000 from next April and a cut in the lifetime allowance from £1.8m to £1.5m from April 2012. They were designed to claw back £4bn of the £19bn cost of pension tax relief, while simplifying the previous government's attempts to reduce the bill.

"Overall the Treasury has done a very good job here," says Tom McPhail, the head of pensions research at Hargreaves Lansdown. "The package is well balanced. The original £255,000 annual limit was so out of sight for the vast majority of people as to be effectively meaningless. Although £50,000 is still far more than most people's aspirations to save each year, it will help spread the balance."

But, says Mr McPhail, there will still be losers among those who are not as "broad-shouldered" as those earning six figures.

He cites the example of a 50-year-old man earning £70,000 a year with 25 years' service in a pension scheme which pays one-sixteenth of his final salary for every year he has worked. He receives a promotion and pay increase to £80,000. Under the new rules his deemed pension contribution would be calculated at £87,333, so he could find himself hit with a £19,000 tax charge at the end of the year on the excess over the annual allowance.

But were he in a career-average scheme, his pension would be a few thousand a year lower, but he would not be affected by the lower annual allowance or the £19,000 tax charge.

This has led some experts to speculate that this push away from final- salary schemes may well have been an additional aim of the Treasury. However, there is provision in the new rules for pension-holders to carry forward up to three years of unused allowance.

This provision may also help business owners who have paid little into a pension, expecting to pay a large lump sum taken from the business into a pension as they near retirement. Simlarly with those who would like to use a house sale or legacy to supplement their plan.

Although welcoming the carry-forward that will protect entrepreneurs and others with uneven annual incomes such as farmers and freelancers, Mr McPhail warned, that for most people it was a case of use it or lose it: "It is clear from these reforms that everyone should now look on their pension allowance like their ISA allowance, as something to be used every year."

Martin Bamford, of independent financial adviser (IFA) Informed Choice, urges everyone paying into a pension to check with their pension administrator or adviser just what the changes will mean to them, even if they suspect that they are among the majority whose plans will not be affected. "Such changes are always a good time to sit down with your financial adviser and have a retirement health check," he says.

All advisers hope the lower limits will encourage everyone, whatever their income, away from the perception that there is only one way to save for retirement.

"Retirement planning has never been just about pensions," says Jason Witcombe, of IFA Evolve. "It has to include such things as ISAs and paying off the mortgage. Any plan has to be multifaceted. You have to maximise the tax relief across the board.

"While you're a basic rate taxpayer you could defer pension payments while you pay off your mortgage or build up an ISA to its £10,200 tax-free limit. You could think about a pension when you become a higher rate taxpayer, when instead of getting £100 benefit for £80 saved, you will get that same £100 for £60 saved.

Mr Witcombe is also pleased that the changes will be the last for some time: "I hope it will see an end to the constant meddling since 2006. It will give much more clarity to the pension regime. It will allow people, whatever they earn, to plan more securely with a clear view of the future."

That future, according to Mr McPhail, has to include a wrapper-type provision. "Simplicity is the key. Working towards a plan that includes a pension, an ISA and savings that are all linked, is the way forward.

"People will have to get used to making an annual decision as to where their money will be most effectively used, taking into account all the tax relief available."

Independent Partners: 10 top tips for retirement. Get your free guide here

Suggested Topics
News
people'It can last and it's terrifying'
News
people Emma Watson addresses celebrity nude photo leak
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
Sport
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
football
PROMOTED VIDEO
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
News
i100
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Infrastructure Lead, (Trading, VCE, Converged, Hyper V)

    £600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...

    Planning Manager (Training, Learning and Development) - London

    £35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

    £40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

    Day In a Page

    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering