Short-term prospects

The long-term attractiveness of pensions for very high earners was put in further doubt as a result of the changes within the pre-budget report in December.

Restricting tax relief to 20% on personal contributions and taxing these people on pension payments made by their employer, from April 2011 onwards, removes the key attraction of locking money away until retirement. However, there are some short-term opportunities, even for high earners, to pay in substantial pension contributions in advance of 2011.

Members of new group pension schemes can continue to receive higher rate tax relief on all contributions, as long as the new scheme meets certain requirements. This means many high earners have the opportunity to get considerable tax-efficient payments into a pension in this tax year and next. And those with income above £150,000 may even get 50% tax relief next year on their personal contributions, as well as facing no tax on their employer’s payments.

For a new scheme to qualify, at least 20 people have to be building up benefits on the ‘same basis’ as the high earner. For example, if the percentage employer contribution is the same for the whole group, the high earner is likely to get a much greater pension contribution due to their higher income. Larger companies may find it reasonably straightforward to find 20 high earners for whom they are happy to pay generous amounts for this short period.

HM Revenue & Customs has also confirmed a scheme with age-related tiers can still meet the requirements, as long as there are 20 people within the scheme overall – as the individual cannot manipulate the contribution they receive. Given that high earners are likely to be older, it may be relatively straightforward for a smaller company to construct a reasonable age-tiered structure which means key individuals receive substantial tax-efficient contributions up until April 2011.

Where a group scheme isn’t feasible, the industry has been lobbying Government to ease the position. Currently, if a high earner is paying large regular contributions, higher rate tax relief is only given if those payments continue to the existing scheme. I expect we will receive regulations in February which mean that ongoing regular payments can be made to any pension arrangement. This will allow people the freedom to switch providers where they believe that is necessary, without affecting the tax relief they receive.

Those individuals who didn’t have a large regular payment in place on budget day can pay at least £20,000 this tax year and next and still receive higher rate relief. This can rise to the average ad-hoc payments made over the last three years, with a maximum of £30,000.
It’s no secret that higher rate tax relief on pension contributions is an exceptionally valuable benefit. So those high earners affected by the achanges in the budget and pre-budget should carefully consider paying the most they can this year and next, to make the most of this opportunity.

If you disagree with these exceptionally complex changes, HM Treasury’s consultation runs until 3 March – a sizeable vote of no confidence by the whole industry may just make them consider other alternatives.

Andrew Tully is senior pensions policy manager at Standard Life