UK finance minister Gordon Brown has gone ahead with his plan to simplify the taxation of pensions in the UK. In his annual Budget, presented to Parliament today, he replaced all eight pensions tax regimes with a single regime, to be deferred a year and to start from 2006.
In December 2002, the UK government issued a consultation document entitled, “Simplifying the taxation of pensions: increasing choice and flexibility for all.” The second consultation document, “Simplifying the taxation of pensions”, was issued in December 2003. The date the proposals are due to come into force (so-called A-Day) has now been deferred a year and set at 6 April 2006.
Trevor Llanwarne, chief actuary of Pensions for the UK at PricewaterhouseCoopers, welcomed the decision, but warned of even greater complexity for senior executives facing the 1.5 million lifetime cap on pensions savings for 2006/7, rising to 1.8 million by 2010.
“The Chancellor’s announcement is good news; we’ve now got the go ahead for reform with a few welcome improvements, meaning people and companies can plan,” he said. “The 1.5m lifetime cap on pensions savings will be a small but valuable improvement (7%) on the 1.4m cap widely expected and the projections to 2010 (at 4.7% per annum) should represent an increase significantly in excess of inflation – again a welcome move. The announcement does however bring further complexity for senior executives. They will need a personal roadmap and in-depth actuarial, personal finance and tax planning guidance to help them navigate the complex issues behind the 1.5m lifetime cap. Many will face confusion about whether to maximise, minimise or keep funding at the same level before A-Day – now 6 April 2006 – when the proposals come into force. They will have to address issues such as whether to stop pedalling or pedal harder in terms of the contributions they make, to ensure they are in the right place when the 1.5m cap barrier comes down. A number of people will not be happy with the extra year’s deferral to 2006. Those retiring in that year to April 2006 will rue the lack of flexibility. But if that is the price of getting things right in the legislation and for considered company planning, then it’s a price worth paying. In summary, for 98% of the population, the world of pensions, post-2006, will be much simpler. For the top 2% of earners, however, it has now become much more complex. Companies should take time, look at pensions as part of their overall reward strategy and get things right for the long-term.”