Pension changes could hit firm bosses

Glynn Bartley
Glynn Bartley
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Business owners could be hit by changes to pension rules, a local expert has warned.

The Chancellor claimed in yesterday’s Autumn Statement the smaller ‘break’ would save the Treasury £1bn by 2017.

He also said that the lifetime allowance would be cut from £1.5m to £1.25m from 2014-15.

Mr Bartley said: “The Chancellor has said it will only impact the top 1% of people but in practice it could be a lot more than that.

“In particular, business owners who might be coming closer to retirement, could look to put larger contributions into a scheme to allow them to catch up on benefits.

“The average contribution is something like £6,000-a-year, so the Chancellor is correct that this will impact the few rather than the many, but I expect the impact will be greater than he suggests.”

The Chancellor also confirmed that from next year, the basic state pension will increase by 2.5% or around £2.70 a week extra to £110.15 a week.

He told MPs: “I know these tax measures will not be welcomed by all; ways to reduce the deficit never are. But we must show we’re all in this together.

“When you’re looking for savings, I think it’s fair to look at the tax relief we give to the top 2%.”

A number of tax experts have lined up to attack the decision which they said will not just hit “fat cats” but middle income earners who are planning to build up their pension pot in later life.

Martin McFall, pensions partner at law firm Trowers and Hamlins, said the changes will only immediately affect the “wealthy few”, with just 1% of pension scheme members making annual payments of more than £40,000 and 98% of people approaching retirement having a pension pot worth less than £1.25 million.

However, Mike Smedley, pensions partner at KPMG, pointed out that people tend to try to build up their pensions towards the end of their working lives, after housing and family costs have eased off.

He said: “This change will bring more ordinary people, not just fat cats, into the complicated area of tax charges on their pensions entitlements.

“Because people are not able to save uniformly for pensions over their careers, it will affect the pensions planning of many people as they approach retirement.”

Tom McPhail, head of pensions research at Hargreaves Lansdown said: “This will particularly affect long-serving members of final salary schemes who experience significant pay rises and older members of defined contribution pensions who are trying to catch up on their pension funding.”

Mr McPhail said that a 65-year-old man with a pension pot of £1.25 million will be able to buy a retirement income of £44,957, based on today’s annuity rates, which is a reduction of £8,833 from £53,790 out of a £1.5 million pension pot.

The cut in the annual allowance means that saving £10,000 a year less into pension over 25 years will result in a pot which is £425,000 lower, based on a 6% return, he said.