Final Salary schemes – changes to accrual
The method of calculating what the value of a years’ benefit in a final salary scheme is worth in contribution terms will also be altered and the factor used to value benefits against the annual allowance will increase from 10 to 16.
Simply put if a member of a scheme accrues a further benefit of say £5,000 per annum this will now be the equivalent of a contribution of £80,000 compared to £50,000 and a 55% tax charge of £16,500 may result – subject of course to any ability to carry forward unused relief.
This is an area where great care will be needed and some members may need to consider opting out of membership as in addition to the initial tax relief issue, they also need to consider the how the lifetime allowance impacts on them in the longer term. We have a number of client who have very significant , sometimes paid up final salary benefits and alongside these, substantial personal pension funds – we will be reviewing these cases in detail and will advise on appropriate action.
What do you need to do?
Nothing – yet! We will review the positions of all clients who are still pension funding and those who have not yet accessed retirement benefits. Where appropriate we will advise upon reduced or increased funding; early access to avoid the lifetime allowance charge; and opting out of scheme membership where appropriate. We await further announcements about changes that affect those already in receipt of unsecured pensions (income drawdown). We may see changes post age 75 and changes to the tax rate applied to lump sums on death prior to that age (55% seems a popular number).
We will keep you fully informed, but please do not hesitate to contact either Moira or Bernice if you have immediate queries or concerns.