Money Help Desk: Pensions tax rules will hit workers whose pay rises

I WORK for a company in Inverness and have a final salary pension. However, I am only 50 and hoping, as things pick up, my salary might increase. I understand there may be changes to pensions tax which could impact on how much I get on retirement. Do I have anything to worry about or is this only aimed at higher earners than me?

Susie Simpson, a tax manager at PricewaterhouseCoopers, writes:

You are right that changes are afoot for pensions tax. In fact, for those earning 130,000 or more there have already been significant changes resulting in additional tax on certain pension contributions for high earners since April 2009.

From what you say, you do not seem to have been affected by these changes. However, if the government's current proposals go ahead, you could see an impact. Rather than limiting tax charges to higher earners, as was proposed by the previous government, the coalition proposes to apply the changes across the board.

The suggestion is to charge additional tax on any pension contributions which exceed a certain figure in any year. The figure suggested is in the region of 40,000.

With a final salary pension, it is not possible to look at contributions made in a year to decide whether the 40,000 limit is breached. The suggestion is to take the current value of the additional annual pension which accrues each year, multiply it by a factor of 20, and test that against the limit. For every 1 of new pension earned in any year you will be deemed to have made pension contributions of 20.

This means that twice as many final salary scheme members will be caught by a tax charge, particularly if they have one-off "spikes" in their scheme value as a result of promotions. If you got a 20 per cent pay rise on an 80,000 salary you could be looking at an additional tax bill of more than 10,000.

It might be that your employer puts a cap on your pension to prevent these types of unpredictable tax charges or looks at other non-pension long-term savings arrangements for you.

Whilst these changes could spell the end of final salary schemes for employers already considering their closure, there does still remain some incentive for pension saving, not least the ability to take up to 25 per cent of the pension pot tax-free on retirement.