Budget 2010: What will be the impact on DB members?

Yesterday, the Government said it would work with the industry on “alternative ways” to implement pension tax relief restrictions, including reducing the annual allowance to between £30,000 and £45,000 instead.

However, it is not yet clear how such a reduction would be applied to DB pension accrual.

The table below - kindly provided by Towers Watson - shows the tax charges that would be incurred by members of defined benefit schemes offering 1/60th of final salary for each year of service if the Government increased the annual allowance multiple to a factor of 15:1 and set the annual allowance at £35,000.

Towers Watson said this assumes no uplift is applied to the starting value to reflect inflation.

In each case, it is assumed that the individual receives a 5% pay rise during the year. In a final salary scheme, each pay rise that someone gets increases the value of the pensions they have earned in the past.

Table 1: Tax charges arising from reducing the annual allowance to £35,000

Row Headings: Number of years service at start of year
Column Headings: Salary at start of year (£)

Source: Towers Watson