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Pensions’ regime for high earners could be made a lot simpler.

Comment 24th August 2010

The pensions’ regime for high earners could be made a lot simpler. We suggest for HMRC approved schemes:

 

  1. For DC schemes

    1. Abolish the LTA
    2. Limit the annual contribution to £40k
  2. For DB schemes

    1. Have a maximum final pensionable salary of £120,000
    2. Have a maximum accrual rate of one sixtieth of final pensionable salary (thus the maximum annual accrual would be £2,000, which if we assume a multiplier of 20 is similar to the DC limit)
    3. Have catch all anti avoidance rule so that if benefits are enhanced in the 5 years prior to retirement, the maximum value of the enhanced benefits is say £200k (using a transfer value calculation).
  3. If a person has entitlements in both DB and DC pension plans, the above limits would be pro-rated.

 

This DC proposal mirrors the way the ISA limits operate.

 

The administration of those people who are at or around the DC LTA is complex. Our proposal removes this complication.

 

Our DB proposal assumes a multiplier of 20 – so is unattractive for some, e.g. those aged 40, who are likely to move to another company in the next 10 years, will tend to prefer a reasonable DC alternative if the company offers it.

 

To preserve the Government’s goal of fiscal neutrality, the £40k and £120k figures could be varied, but the over-riding principles above could be intact.

 

 

 

We would urge the reduction in the maximum combined income tax and NI rates (soon to be 52%) down to the previous level of 40% as soon as possible. High tax rates create scope for tax avoidance. Lower tax rates remove the incentive for tax avoidance and, as history teaches us, lead to higher tax revenues.

 

Knowledge of likely future tax rates is integral to pension and wealth planning. Hence, we believe these issues should be considered together.

Why does this matter?

The administration of those people who are at or around the DC LTA is complex. My proposal removes this complication.

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