In any Final Salary Pension scheme? Stand by to be crapped upon

Never mind Child Benefit, Uni. Fees, or Winter Fuel Allowance. This one is going to hurt long term.

Spin will be that it will only hit "high earners". But the Devil is not so much lurking as laughing wildly in the detail.

If the Treasury has its way a lot of people, who are by no means high earners, will find sooner or later that the only logical course left to them is to ask to be cashed out of their pension scheme (and maybe pitch into a SIPP) in order to avoid crippling tax charges.

That being so a great many of the remaining final salary schemes will simply start to close out.
This happened to us this year.... lost 25% of our workforce as a reult as people took early retirement to keep their pensions...I really cant express how much fun its been for the rest of us left to pick up the work....

Any chance of a link to back up your claim?

People are still wotking through the detail but here is just one example of who bloody difficult it will become in final salary schemes.

You have to bear in mind the Employer and pension scheme Trustees have a duty of care to be sure that members of such schemes understand their position and are properly advised, and that will vary on an individual basis.

(The question to ask in the example below is what happens if the individual does not have the carried forward relief)

"The government today confirmed it will cut the annual allowance from £255,000 to £50,000 and the lifetime limit from £1.8m to £1.5m.

Additionally, it has increased the factor for valuing final salary benefits from 10 to 16.

But how do you calculate the tax charge?

We use the example of a member who has been a member of a 1/60th final salary scheme for 34 years and gets a 20% pay increase from £60,000 to £72,000.

Such a member would see her tax liability calculated as follows.

First the opening pension entitlement is calculated as £34,000 (34/60 of £60,000).

Next the opening annual pension entitlement is revalued. If the individual had stopped accruing pension after 34 years, then the pension would have been uprated by the CPI. If the CPI increase is assumed to be 2.5%, then her pension earned after 34 years would have risen from £34,000 to £34,850.

The closing pension entitlement is then calculated. If pension accrual instead continues, then her pension will rise to £42,000 (= 35/60 x £72,000) as a result of the extra year's service and the pay rise in the 35th year.

The increase in annual pension entitlement is therefore £7,150.

This is then multiplied by the new annual allowance factor of 16 to give a deemed contribution of £114,400 - £64,400 in excess of the annual allowance.

Once deemed, the contribution can be tested against the individual's annual allowance, taking account of unused allowance from the previous three years, and any charge due can be determined.

If this particular individual had received increases in pay of 5% per annum in her 32nd, 33rd and 34th years then her allowance in each of these three earlier years was £50,000, but her contributions over those three years totalled only £80,600 (£25,200 + £26,800 + £28,600).

She therefore has unused allowance from these earlier years of around £69,400 (= 3 x £50,000 - £80,600) available to carry forward - and therefore has an effective annual allowance in her 35th year of £119,400 - sufficient to cover the deemed contribution in that year of £114,400 and still leave £5,000 to carry-forward to future years."

How to calculate new tax charges for your DB clients - IFAonline
Looking at the numbers in the exampl,e is it possible for this to be an issue for even the most dynamic of career thrusters in the AFPS?
Serious head on to balance my facetious comment above.

The Forces Pension Society The Forces Pension Society have had an initial look at this and are investigating further. They seem to think this will only affect those that get a pension uplift of £3000 or more.

If you want more detail you will have to become a member.


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