Huge tax rises for members of final salary pension schemes

At the moment, if you are a member of a final salary pension scheme and you and your employer are paying money into the scheme to provide you with a pension, the value of the additional benefit is multiplied by 10 to check whether you are receiving something where the value might be greater than you are allowed before any tax is paid.

What does this mean?

If you are 59 earning £160,000 per annum and you are a member of a 60ths pension scheme, the value of one extra year of pension is assumed to be 1/60th of £160,000 = £2,666 x10 or £26,666.

However, Alistair Darling introduced a new set of multiples (which vary in relation to age) in the pre-budget report in December. From 2011, higher multiples will be used for older employees to calculate the value of these benefits. Using the same example, the new multiple to be used would be 23 x, making the value £61,318 (without any allowance for a pay increase or promotion).

So far, so good - it is still within the current allowance for a single year of £245,000, so still no tax to pay.

However, let's say that after 30 years service, the 59 year old was appointed to a new more senior position with his employer with an increase in salary to say £205,000 per annum, his increase in pension benefit would then be enormous. In this example, the increase in pension could be as much as £20,000, which when multiplied by the new factor of 23, means that he has received an increase in benefits valued at £690,000 in a single year and he could be liable for a tax bill of more than £163,000. (Figures provided by John Lawson, Head of Pensions Policy at Standard Life).

These huge tax charges could have a serious impact on high earners, anyone earning more that £150,000 per annum will already be feeling the effect of the new 50% income tax rate.

What to do next

If you are a member of a final salary pension scheme and need help planning when to take your benefits and in what form or you are simply trying to avoid paying 50% tax,use our contact form we will work with you and your tax advisers to find a workable solution.