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COLUMN: Roy Davidson - Slashing at the value of pension

THE widely mooted reduction in the pension Annual Allowance (predicted in the media as a likely/sure for the forthcoming Autumn Statement) will dramatically reduce the value of the pension funds.

THE widely mooted reduction in the pension Annual Allowance (predicted in the media as a likely/sure for the forthcoming Autumn Statement) will dramatically reduce the value of the pension funds.

We’ve calculated that to compensate for a reduction of £50,000 to £30,000 in the annual pension allowance, a typical higher earner, such as a company director, will have to save at least an extra £200,000 from their gross income towards their retirement.

Pensions are a very efficient and much needed way of ensuring people can enjoy retirement comfortably. If the current Annual Allowance is reduced, it’s not simply a matter of taking that money and investing it elsewhere – substantial extra amounts are needed because of the less favourable tax treatment received by other savings methods.

Overall, reducing the pension Annual Allowance further will affect many more people than the hotly debated ‘mansion tax’ and further erodes the ability of successful people who have worked hard, to invest so they can also enjoy their retirement.

It is worth noting that the Annual Allowance has already been recently reduced from £255,000 to £50,000. Many of the people affected will not be fully aware of its impact since tax returns for the first tax year of its impact do not need to be submitted until January 31, 2013. In other words, many people may not yet appreciate the impact the recent reduction has had on their finances, and could receive unwelcome large Annual Allowance tax charges in the spring of 2013.

Whilst the legislation was not all introduced by the Coalition, there was no attempt to alter or amend the draft legislation from earlier Labour Finance Acts.

A further reduction in the annual allowance from £50,000 to a lower level of, say, £30,000 will affect even more people, including employees in final salary schemes who could face a large and unexpected tax charge.

We’ve yet to see what happens in the Autumn Statement this week, but if rumours are anything to go by, it looks likely it could affect your pension pot significantly.

:: Roy Davidson, a manager in the wealth management team at leading law firm, Dickinson Dees

 

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