Darling to change rules again with pension proposals

Published on Saturday 2 May 2009 13:32

A LITTLE over a week on from Alistair Darling's crucial Budget, the implications for pensions and savings are becoming clearer. And it's a pretty mixed bag.

Darling took steps to improve aspects of the basic state pension and help UK pensioners. For example, he made sure the pension would go up next year by 2.5%, despite his prediction that RPI – one of the measures for inflation and used for fixing increases in state pensions – would remain negative for the rest of this year.

He also plans to help the poorest pensioners, changing pension credit by raising the cash someone can hold without affecting their benefits from 6,000 to 10,000. It's estimated this will raise the income of half a million pensioners by an average of 4 a week. In a climate of very low interest rates on their savings, this could make a real difference to some people's standards of living.

Darling also had news for the growing number of grandparents who have given up their jobs to help out with childcare – a 'granny credit'. As long as the grandparent is of working age, and cares for grandchildren for at least 20 hours a week, they will receive credits towards the basic state pension. From next year, we only have to build up 30 years of national insurance contributions to receive a full basic state pension.

But while Darling was clear that he wanted to help some pensioners more, the general message for saving – and in particular saving for retirement – was far more ambiguous. He did finally bow to pressure, and increase the Isa limits to 10,200 a year, something he had been urged to do for a long time. However, in a peculiar move, the over-50s will get the benefit of this increase this year (although they have to wait until October to make the investment), but the rest of us will have to wait until 2010. Why he wants to create a new age class only for a year is a mystery. It will only confuse and add administration complexity.

The outlook for pensions, however, was altogether more hazy. Pensions are renowned for offering very attractive tax breaks. But Darling's beef is that 25% of all pensions tax relief is given to only 1.5% of the claimants, those who are the highest earners. So, alongside his now infamous introduction of a new 50% tax rate, Darling wants to restrict the pensions tax relief for those who earn above 150,000 to the basic rate, 20%, from 2011. He also intends to change the rules so employer contributions for this group will be taxed as a benefit in kind.

This raises immediate concerns for people who have earnings above this level. To stop them making the most of the current tax rules by ploughing large contributions into pensions ahead of 2011, the Treasury wants to introduce a special yearly check, reducing pension contributions for this group to up to 20,000 for the next two years. People directly affected should seek advice on their pension options. There will be tough decisions to make in the future.

But this is not just about the highest earners. People earning above 100,000 should also have a good hard look at their pension contributions. The 150,000 limit takes into account all earned income, as well as most savings and investment income as well. So it could affect many more people than one would think on first glance. Anyone who thinks they could reach the 150,000 level in future may want to seek advice so they can make the most of their pension contributions today.

These pension changes are just proposals at moment. The Government is pushing forward with a Finance Bill to bring in the changes, but will face strong resistance from some. The new yearly check of up to 20,000 especially is complicated and will cause companies running final salary schemes many sleepless nights as they try to make sense of the Treasury's complicated rules.

But it's the overall message that worries me. These proposed rule changes come only three years after the Treasury reached the 'A-Day' agreement to simplify pensions and promote long-term saving. That major overhaul of pensions was meant to last 30 years rather than three.

• Rachel Vahey is Aegon's head of pensions development

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