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."