Doubt cast on high earners’ pensions

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 and receive higher rate relief.

Further clarification from the Government was forthcoming a few weeks ago, which allows high earners to continue regular payments to a new pension arrangement without facing a special annual allowance tax charge. Under the original anti-forestalling rules, regular pension funding for high earners that was in place before the budget on 22 April 2009 (or pre-budget on 9 December 2009, for those in the £130,000 to £149,999 income bracket) was only protected if payments continued under the existing pension arrangement.

The new regulations change this so that a high earner can take these protected funding levels with them on change of scheme or pension provider – subject to certain requirements. The key requirements for switches to new pension arrangements are:

• The new pension arrangement must start within three months of active membership of the old arrangement stopping.
• If the new arrangement is money purchase, contributions must be made at least quarterly.
• If the old arrangement was a defined benefit arrangement, individuals will lose their protected pension input amount unless the new arrangement is also a defined benefit arrangement providing benefits broadly on the same basis.
• Any new group arrangement must be the result of an employer restructuring their pension arrangements or a ‘relevant business transfer’ to a new employer. This means, in simple terms, if a high earner moves from Employer A’s GPP to Employer B’s GPP, he will lose his protected amount. Whereas, if the high earner moves from his employer’s old scheme to their new scheme as a result of a restructure, or if he moves to a new employer who sets up an individual arrangement, protection can be retained.
• However, it’s important to note that the protected amount can be lost if the old arrangement is re-activated, or the individual subsequently becomes a member of a further pension arrangement.

In addition to this new change, there are some other opportunities to maximise pension payments before April 2011. These include the ability to set up a new group pension scheme, where members can continue to receive higher rate tax relief on all contributions, as long as 20 people are building up benefits on the ‘same basis’. In addition, those high earners who were making payments below £20,000 in previous years (including those who made no pension payments) can increase payments up to £20,000 and receive higher rate relief. Some may be able to pay up to £30,000 if there is a history of single payments.

Andrew Tully is senior pensions policy manager at Standard Life