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
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
Life & Style
life
Arts & Entertainment
Jack Gleeson as Joffrey Baratheon in Game of Thrones
tv
Arts & Entertainment
Ken Loach (left) and Mike Leigh who will be going head to head for one of cinema's most coveted prizes at this year's Cannes Film Festival
filmKen Loach and Mike Leigh to fight it out for the Palme d'Or
VIDEO
Arts & Entertainment
Ian Anderson, the leader of British rock band Jethro Tull, (right) and British guitar player Martin Barre (left) perform on stage
musicJethro Tull frontman leads ‘prog rock’ revival
Sport
Gareth Bale dribbled from inside his own half and finished calmly late in the final to hand Real a 2-1 win at the Mestalla in Valencia
sport
Arts & Entertainment
Who laughs lass: Jenny Collier on stage
comedy... writes Jenny Collier, the comedian whose recent show was cancelled because there were 'too many women' on the bill
News
House proud: keeping up with the Joneses now extends to children's playhouses
newsLuxury playhouses now on the market for as much as £800
News
news
Extras
indybest
News
The academic, Annamaria Testa, has set out on her website a list of 300 English words that she says Italians ought to stop using
newsAcademic speaks out against 'Italianglo' - the use of English words in Italian language
Life & Style
tech
Arts & Entertainment
Ricky Gervais at a screening of 'Muppets Most Wanted' in London last month
tvRicky Gervais on the return of 'Derek' – and why he still ignores his critics
Sport
Luis Suarez of Liverpool celebrates his goal
sport
Arts & Entertainment
James Franco and Chris O'Dowd in Of Mice and Men on Broadway
theatreReview: Of Mice and Men, Longacre Theatre
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Helpdesk Engineer Apprentice

    £150.00 per week: QA Apprenticeships: This company has been providing on site ...

    Telesales & Sales Support Apprentice

    £221.25 per week: QA Apprenticeships: This company is a well established Inter...

    Client Relationship Manager - SQL, Python

    £40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

    **Financial Services Tax**

    £35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

    Day In a Page

    Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

    Ricky Gervais: 'People are waiting for me to fail'

    As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
    Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

    Mad Men returns for a final fling

    The suits are still sharp, but Don Draper has lost his edge
    Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

    Google finds a lift into space will never get off the ground

    Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
    Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

    Is sexual harassment a fact of gay life?

    Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
    Moshi Monster creator Michael Acton Smith: The man behind a British success story

    Moshi Monster creator Michael Acton Smith

    Acton Smith launched a world of virtual creatures who took the real world by storm
    Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

    Our journalist tries out Kim Jong-un's haircut

    The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
    A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

    A History of the First World War in 100 moments

    A forgotten naval victory in which even Nature played a part
    Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

    Vespa rides on with launch of the Primavera

    The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
    Record Store Day: Independent music shops can offer a tempting alternative to downloads

    Record Store Day celebrates independent music shops

    This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
    Taunton's policy of putting philosophy at heart of its curriculum is one of secrets of its success

    Education: Secret of Taunton's success

    Taunton School, in Somerset, is one of the country's leading independent schools, says Richard Garner
    10 best smartphones

    10 best smartphones

    With a number of new smartphones on the market, we round up the best around, including some more established models
    Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

    Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

    The former Australia coach on why England must keep to Plan A, about his shock at their collapse Down Under, why he sent players home from India and the agonies of losing his job
    Homelessness: Why is the supported lodgings lifeline under threat?

    Why is the supported lodgings lifeline under threat?

    Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
    A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

    A History of the First World War in 100 Moments

    When the world’s biggest shed took over Regent’s Park
    The pain of IVF

    The pain of IVF

    As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal