George Osborne's Autumn Statement is now widely expected to include a much lower cap on the sums people can pay into their pension each year before they lose tax relief. Osborne is being coy about the contents of the statement, but the experts are widely predicting that you won't be able to pay more than £30,000 into a pension in a year.
That sounds like the sort of cap that can only affect the mega-wealthy, but the experts are warning that it will have a huge impact on many of those on a defined benefit (final salary) pension scheme - and it could lead to the closure of these schemes altogether.
The capThe annual cap has already been reduced dramatically in April 2011. John Richardson, head of retirement planning, at pension experts Towry explains: "Currently each year you can save a maximum of £50,000 into your pension pot, this rate being recently cut from its previous £255,000 level. Yet there is plenty of noise to suggest the annual allowance may be cut again to £40,000 or even £30,000 as the Chancellor looks to make further inroads into the UK deficit."
Middle-earnersThe nature of these schemes, coupled with a troubled investment market and increasing longevity, means many workers have a surprisingly large sum of money ploughed into these schemes each year in order to guarantee their benefits. Niki Cleal, Pensions Policy Institute Director, said: "A combination of increasing life expectancy and changes in regulation and legislation has substantially increased the level of pension contributions needed to fund a typical defined benefit pension scheme, from an estimated 11% of salary in the 1950s to 21% of salary in 2012."
The National Association of Pension Funds has calculated that a cap of £30,000 could hit anyone earning upwards of £40,000. Joanne Segars, NAPF Chief Executive, said: "If the Chancellor goes ahead, it's not just the rich who will be affected, but also middle earners. Moderate earners paying into a final salary pension who have built up many years of service could be hit with significant, one-off tax bills as a result of modest promotions."
John Cridland, Director General of the CBI has warned in a letter to Osborne: "Reducing the tax free limit would fly in the face of the Government's efforts to encourage more people to save adequately for their retirement, and its drive to position the UK as a world-leading business investment location."
Closing schemesIt means many thousands of people could be affected by the cap, which would give companies yet another reason to consider closing these schemes altogether. Segars points out that this trend is already well underway, with just 19% of all defined benefit schemes open to new members.
She adds: "Our pensions tax system has undergone big changes in recent years. This has added significant costs to businesses and pension schemes, and has damaged people's confidence in pensions as a way to save. Faced again with another change, both employers and employees risk losing confidence in the system and becoming disengaged with pensions saving."
Chris Noon, a partner at Hymans Robertson, told the Daily Telegraph: "We've had a number of clients that have indicated that they may look to close their defined benefit plans if the annual allowance were to fall as low as £30,000."
What seems like a small measure, affecting the mega-wealthy, could therefore have a devastating effect on thousands of people, who see their final salary scheme closed, and replaced with a far more risky option.
But what do you think? Should Osborne press ahead, or is he heading for disaster? Let us know in the comments.