Schemes fear executive exodus over reduced lifetime allowance

The proposal to reduce the lifetime allowance from £1.8m to £1.5m would mean any individual with pensions savings between £1.5m and £1.8m would face an unexpected tax bill once the rules change on April 6, 2011.

“It’s pretty short-sighted to have a hard stop like that without some sort of transitional arrangements or some protection as you go above £1.5m,” said Chris Noon (pictured), partner at Hymans Robertson.

He revealed he had one client where all the senior management team would be impacted if the lifetime allowance dropped to £1.5m. Many of them have the contractual right to retire between age 50 and 55.

“The firm are therefore very worried because suddenly they could lose a large proportion of their senior management team between now and April because the only option for them is to retire or be hit by a hefty tax bill,” Noon said.

The Treasury document also proposed limiting the annual allowance to between £30,000 and £45,000.

Currently schemes can set their own pension input period, which is the period of time over which an annual allowance is measured.

But the document proposed setting the tax year as the standardised input period. It argued it would simplify the process for schemes which would have an increased number of members affected by the reduced annual allowance.

Rosie Kwok, technical manager at Mercer, said if this was not brought in sensitively it could do more harm than good.

“If they’re going to go down that route and force it, it would be helpful if they gave employers a transitional period rather than doing it in one big bang,” she said.

One noticeable absence from the consultation document was detail on how the annual allowance would work with second state pension (S2P).

For contracted in schemes, the S2P would presumably be unaffected by the annual allowance; but for those that are contracted out, the total accrual would be affected, including the S2P rebate.

Members of contracted out schemes would therefore have less overall annual allowance than members of contracted in schemes.

A possible suggestion is to have two different annual allowances: £40,000 for contracted in schemes and £42,000 for contracted out schemes.

This would solve the disparity between the two types of arrangements, but it would also add an additional layer of complexity.

For a government which has stated its intention is to simplify the pensions system, this option could be unpalatable.