Mid­dle earn­ers in pen­sion tax re­volt

The Daily Telegraph - Your Money - - MONEY -

Pub­lic ser­vants across Bri­tain are re­volt­ing against pen­sion rules they say punch holes in front-line health, jus­tice and emer­gency ser­vices in a bid to get the Chan­cel­lor to im­prove rather than cut tax relief in next month’s Bud­get.

More than 20 bod­ies rep­re­sent­ing tens of thou­sands of mid­dle earn­ers in the Armed Forces, po­lice and prison and fire ser­vices have united to lobby the Gov­ern­ment to change the tax­a­tion of pen­sions.

Philip Ham­mond, the Chan­cel­lor, is gear­ing up to de­liver his Bud­get on Oct 29. Ring­ing in his ears is a call from the Trea­sury Select Com­mit­tee to cut the amount that savers can put into their pen­sions each year, thereby sav­ing the Gov­ern­ment some of the £24.1bn it is fore­cast to forgo in tax relief this year.

But the group of 21 em­ployee bod­ies said penal­ties that once af­fected only the high­est earn­ers now hit those on more mod­est in­comes of around £50,000 a year af­ter six cuts to pen­sion tax relief lim­its in the past eight years.

Those who are in de­fined ben­e­fit pen­sion schemes are par­tic­u­larly af­fected, but all high-level savers can be caught.

An­drew Hop­kin­son, na­tional sec­re­tary of the Fire Lead­ers As­so­ci­a­tion, which is head­ing the cam­paign, said: “Nurses, po­lice, fire­fight­ers, den­tists, civil ser­vants and the Armed Forces are be­ing hit by large tax charges run­ning into thou­sands of pounds, of­ten sim­ply by re­main­ing in their pen­sion scheme.”

“To avoid these re­cur­ring tax charges key staff in vi­tal pub­lic ser­vices are not work­ing ex­tra shifts, de­clin­ing pro­mo­tions, or leav­ing.”

In the fir­ing line is the £40,000 limit on the amount that savers can add to their pen­sions each year with the ben­e­fit of tax relief. Savers who breach this an­nual al­lowance must pay a tax charge of 20pc-45pc, de­pend­ing on your mar­ginal rate.

Cam­paign­ers ar­gue that the way pen­sion growth is cal­cu­lated in de­fined ben­e­fit schemes means savers can ex­ceed the al­lowance just by be­ing long-term mem­bers or work­ing reg­u­lar over­time.

The an­nual al­lowance has fallen from £255,000 when in­tro­duced in 2006-07 to £40,000 since 2014-15. A “carry for­ward” sys­tem al­lowed un­used al­lowances from the pre­vi­ous three years to be rolled over, soft­en­ing the ini­tial blow. But 2018 marks three years of the an­nual al­lowance be­ing £40,000 and pen­sion savers are now bump­ing up against the limit.

HMRC mul­ti­ples the an­nual growth of your de­fined ben­e­fit pen­sion by 16 when test­ing against the an­nual al­lowance, an­other fac­tor push­ing peo­ple over the limit; be­fore 2011 sav­ings were mul­ti­plied by 10.

Se­nior staff and those with more than 20 years’ ser­vice are most likely to face an an­nual al­lowance penalty.

Growth is cal­cu­lated by find­ing the dif­fer­ence from the year be­fore. In an ex­am­ple pro­vided by the Civil Ser­vice Pen­sion Scheme, as­sum­ing ac­crued ben­e­fits at April 5 2017 of £10,000 and mul­ti­ply­ing by 16 gives growth of £160,000, plus the scheme’s au­to­matic lump sum on re­tire­ment of £30,000, bring­ing the to­tal to £190,000.

This is then sub­tracted from the April 5 2018 fig­ure (in this ex­am­ple, £15,000 mul­ti­plied by 16 to get £240,000, plus a lump sum now at £45,000, to get £285,000). This gives an­nual growth of £93,100, more than twice the £40,000 al­lowance.

Guid­ance from the Bri­tish Med­i­cal As­so­ci­a­tion warns that NHS staff “with long ser­vice and or sig­nif­i­cant pro­mo­tional pay rises” are most likely to be af­fected.

Pen­sion savers are not al­lowed to avoid an an­nual al­lowance charge by re­quest­ing a re­fund of con­tri­bu­tions. If they do, it be­comes an unau­tho­rised pay­ment and is taxed at 55pc.

In­di­vid­u­als can be left to find the money to pay penal­ties for breaches them­selves ev­ery year they oc­cur. In cer­tain cir­cum­stances they can elect for their pen­sion scheme to pay the re­sult­ing charge from their pen­sion sav­ings, known as “scheme pays”.

Mr Hop­kin­son said: “Penal­ties are of­ten re­cur­ring and while scheme pays is an op­tion, many see the re­duc­tions to their pen­sion as un­palat­able.”

All of those in the work­ing group “fully ac­cept the need to pay a fair level of tax­a­tion”, he said.

“We are seek­ing to im­prove flex­i­bil­i­ties in the var­i­ous pen­sion schemes to help in­di­vid­u­als and em­ploy­ers bet­ter man­age their pen­sion and per­sonal tax li­a­bil­i­ties,” he added. “It is ab­so­lutely not about tax avoid­ance but en­abling em­ploy­ers to re­cruit and re­tain vi­tal staff.”

Tele­graph Money has pre­vi­ously dis­closed how pen­sion tax rules may be in­creas­ing NHS wait­ing times.

Dr John Miller, a con­sul­tant who has worked for the NHS in the UK, abroad and in the Forces, said his peers were giv­ing up ex­tra clin­ics and re­fus­ing over­time be­cause the high­est earn­ers had their al­lowance ta­pered even fur­ther to £10,000.

He said: “A small in­crease in pay could lead to an ex­ag­ger­ated tax bill a year later. A £3,000 pay lift might re­sult in a tax bill of £10,000.”

A Trea­sury spokesman said: “We want peo­ple to save into a pen­sion, which is why we al­low the ma­jor­ity to make con­tri­bu­tions tax-free. Those who in­cur a tax charge pay in­come tax on con­tri­bu­tions that ex­ceed the an­nual al­lowance, as they would for any other in­come.”

Rad­i­cal pro­pos­als to let em­ploy­ees choose where their com­pany pen­sion is held are be­ing dis­cussed by the Gov­ern­ment and se­nior fig­ures in the pen­sions in­dus­try, writes Sam Brod­beck.

Guy Op­per­man, the pen­sions min­is­ter, is to at­tend a meet­ing next month or­gan­ised by rep­re­sen­ta­tives from sev­eral pen­sion firms, in­clud­ing Har­g­reaves Lans­down, Bri­tain’s big­gest bro­ker, to dis­cuss plans that would al­low savers to pick their own work­place pen­sion provider, Tele­graph Money un­der­stands.

Har­g­reaves has been lob­by­ing the Gov­ern­ment to amend pen­sion rules that cur­rently mean em­ploy­ees’ work­place sav­ings are held by the provider cho­sen by their em­ployer.

Let­ting staff pick their own firm, the stock­bro­ker ar­gues, would boost en­gage­ment with pen­sions and, it claims, pre­vent a build-up of mil­lions of “lost pen­sion pots”.

If im­ple­mented, savers would be given ac­cess to a far greater range of in­vest­ments.

The meet­ing is due to go ahead de­spite the De­part­ment for Work & Pen­sions ap­pear­ing to shoot down sug­ges­tions of changes to the ex­ist­ing “auto-en­rol­ment” model. In the Gov­ern­ment’s re­sponse to an MPs’ in­quiry into pen­sions costs and trans­parency, it said the pro­posal was “not an im­me­di­ate pri­or­ity”.

Tom Selby of AJ Bell, a fund shop, said giv­ing staff a choice over their provider would “in­crease the in­cen­tive for work­ers to pay at­ten­tion to their pen­sion”. A spokesman said the Gov­ern­ment’s po­si­tion was un­changed.

Tens of thou­sands of pen­sion savers have united in protest as an­nual al­lowance cuts hit pub­lic ser­vices, re­ports Laura Miller ‘It is not about tax avoid­ance but re­cruit­ing and re­tain­ing vi­tal staff’

Guy Op­per­man, the pen­sions min­is­ter, is to dis­cuss the pro­pos­als next month

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