A pension tax trap

ON THE face of it, £1 million sounds like a lot of money.

So when the Government reduced the cap on how much you can build up in a pension pot to this amount, it looked like a move designed to penalise the super-rich.

The Treasury told us it would hit just 4 pc of workers approaching retirement age — that’s around 72,000 over the next three years.

But as the weeks have passed since the announcement, financial advisers and accountants have grown increasingly concerned at the number of clients passing through their doors who are likely to pass this cap.

They’re not chief executives, financial directors or fund managers (though they are affected, too) — but senior schoolteachers, middle managers and fortysomethings who have had good careers. Largely, they have all saved for a couple of decades into final salary schemes.

The reason why so many are sleepwalking into huge tax bills on their pensions by passing the cap is because of the way final salary benefits are calculated.

Working out how much you have in a defined contribution scheme is as simple as looking at the current value of your funds.

But in a final salary scheme, the benefits you build up are based on your career earnings. To get the total value of your pot, you need to multiply the figure by 20.

So, if you have a £20,000 final salary pension (roughly what you’d expect a staff nurse with long service to accrue), the deemed value of your savings is £400,000.

The problem is that this 20 times calculation was set by the Treasury in 2006 and now seems spectacularly generous. Today, to get a matching £20,000 annual income from a defined contribution scheme, you’d probably need a pension pot exceeding £700,000.

And as this week’s Mail investigation reveals, the calculation particularly benefits senior bosses in the NHS and civil service, who can build up pensions two or three times greater than the private sector, while still not hitting the Government’s lifetime cap.

If we want equality in our pension system, it’s time for this 20 times calculation to change.

And we need to do this in a way that does not penalise the root and branch frontline staff who rely on final salary schemes to reward them for years on relatively low pay. There are two options. One could be to limit the benefits anyone can build up in a final salary scheme — perhaps capping it at £40,000 a year. That reduces the opportunities for bosses to accrue vast sums, and the liabilities on the taxpayer. The second option is simply to revisit the 20 times calculation. Annuity rates have fallen by 20 pc since 2006 — but even then it seemed unnecessarily generous.

Multiplying the pots by 30 times (so a £20,000 final salary pension would be worth £600,000) would also solve the problem.

This would go some way to ensuring pension savers get equal treatment across the board — and that those in defined contribution schemes aren’t forever left lagging behind those lucky enough to have final salary benefits.

Any old excuse

BURGLARY is largely an opportunistic crime. Thieves target streets where they can prowl around undetected or where it is easy to tell whether residents are at home. They don’t sit outside your house waiting for you to go out, like the bungling thieves in the film Home Alone, or watch your social media account, waiting for you to tell everyone you’ve gone to Majorca for two weeks.

(And while we’re on the subject, crooks also don’t sift through your recycling to find bank statements you’ve ripped up in order to commit identity fraud — it’s far easier to buy your details through a third party). Insurers know all this. Their actuaries see the crime statistics and know what the risk is of having to pay out for each one.

But that won’t stop them from rejecting claims because a customer happens to have posted their holiday photos on Facebook.

It’s another example of them finding any old excuse to turn down your perfectly legitimate claim. The practice may not be rife in Britain yet — but it already happens in the U.S.

It makes you wonder what they’ll do next: turn down a claim because you set up an automatic ‘out of office’ reply on your work email?

It’s purely coincidental that you happened to be burgled while you were away. You’d have to be paranoid or have an inflated sense of self- importance to think someone is spending all their time waiting to get you . . . just YOU.

Think about how much time and effort this would take for a criminal, compared with just walking down a road and seeing which homes don’t have lights on or have post piled on the doormat.

That said, putting your every move on the internet is not very clever. It doesn’t make you a victim — but it does make you a target.

We already know that Revenue officials, for example, regularly look up people online when doing a tax investigation.

In the digital age, information is money. So think twice what details you want strangers to learn about you — not just today, but in the future, too.

j.coney@dailymail.co.uk