Potential Banana Skin for Government in Pensions Reform, Says ACCA

London, United Kingdom, August 28, 2010 --(PR.com)-- Pension taxation reform could prove to be a real test of the Government’s ‘fairness’ and ‘personal responsibility’ credentials, warns ACCA (the Association of Chartered Certified Accountants) as the deadline for responses to the Government’s second review on the subject arrives.

“This issue could turn out to be a real banana skin for the Government,” says ACCA’s head of tax Chas Roy-Chowdhury. “The current rules are specifically targeted at those earning over £130,000, but the new proposals could see individuals earning around £40,000 [1] being affected. I know we’re supposed to be ‘all in this together’, but the proposed changes will do more harm than good. Is it fair that a tax burden previously borne only by the most well-off is now spread to thousands of ordinary families and individuals trying to save for a more sustainable retirement? Public finances might be tight, but by going after pensions, the Government could cause long-term pain for short-term financial gain.”

Responding to the Government’s consultation exercise, ACCA has argued for past accruals (built up pension entitlements) not to be brought into the calculation. ACCA has also suggested using a lower allowance for those just starting out in work and a larger one for those over the age of 50. It is disappointing that such a big overhaul should be happening only five years after A-day.

Mr Roy-Chowdhury continues: “People who are approaching retirement should not be forced to reduce their pension savings. This seems to run against the ‘big society’ ideal of people taking responsibility for their own financial security. The changes could be the final nail in the coffin of many of the remaining private sector defined benefit schemes.”

With public finances tight, the Government has found itself considering two tough alternatives for pension taxation:

Keeping the current system. This sees tax relief restriction set at 20% on pension contributions, and is aimed at those earning £130,000+. However, the system is complex, convoluted and compliance-burden heavy.

Massively reducing the tax efficient annual allowance (AA) from £255,000 to between £30,000 and £45,000. If the AA is set towards the £45,000 mark, many earning a whole lot less than £130,000 could be caught up in the system, especially if they make Additional Voluntary Contributions (AVCs).

“Neither of the two options is entirely palatable and I understand the difficulties posed by the public finance situation,” adds Mr Roy-Chowdhury, “but the Government has to listen to the concerns raised this time around. The summary of responses to the first consultation on the matter was unable to quote a single supportive response, but the measure was passed in the 2010 Finance Act without addressing any of the concerns that were raised. We have made a number of suggestions in our response and look forward to hearing the Government’s reaction to them.”

[1] This is based on the way the Government plans to value contributions. A ‘flat factor’, which could be as much as 20, would be used to multiply any increased pension entitlement a member has accrued during the course of a year. Higher than usual income increases e.g. due to promotions, could trigger a tax charge.

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For further information, please contact:

Nick Cosgrove, ACCA Newsroom
+44 (0)20 7059 5989
+44 (0)7963 496144
nick.cosgrove@accaglobal.com
Hannah Smith
Ruder Finn for ACCA
+44 (0)20 74628949
hsmith@ruderfinn.co.uk