The Treasury has this week confirmed limits on pension saving that will lower the annual allowance, which is the maximum amount payable into pensions schemes in any given year.

The current annual allowance of £255,000 will be cut to between £30,000 and £45,000, but with the proviso that the new, lower limit will have full tax relief, whereas the higher pensions saving limit had only limited tax relief.

The measures will please those in the pensions industry who have been calling for a simplification of the rules governing pension saving, private pensions schemes and company pensions schemes. These have even included voices from within the Revenue Commissioners (HMRC), who had admitted that keeping staff on top of the constantly evolving tax regulations on pensions schemes was increasingly difficult.

However, the Treasury’s proposals will affect more pension savers than the proposals left in place by the previous Labour government, which had been aimed at those earning over £130,000 a year.

The confirmed proposals on pension saving and pensions schemes have already been applauded by a spokesperson for the National Association of Pension Funds (NAPF) as a simpler approach that would have indirect benefits for pension saving options of all those in company pension schemes.

By encouraging higher earners to remain in company pension schemes, the new rules would make those company pension schemes more stable and secure for all employees, said NAPF.

With a national deficit of £155bn and only £6.2bn of savings already clearly earmarked in the budget proposals – what can you expect, when the chips go down on Tuesday 22nd June?

Here is our roundup of budget changes already announced, of budget proposals that appear likely, and of other possible government budget cuts to come.

Pensions: removing compulsory annuitisation, gradually increasing the current retirement age, improving occupational pension schemes and restoring the link between state pensions and earnings.

Government has quoted figures from the Office for Budget Responsibility to show that the costs of expensive public sector final salary pensions schemes, such as those in the civil service and other public bodies, will more than double to £9bn by 2015. Calling these ‘unreformed gold plated’ pension schemes ’unfair’ and ‘not affordable’, a review has been promised as a matter of priority.

Government may be planning budget changes to scrap compulsory annuitisation, removing the legal requirement to buy an annuity with your pension savings by age 75.  This will give those with large pension pots of £100,000 or more the option to hold on to their money, perhaps leaving it invested in the stock markets in an ‘income drawdown’ arrangement, rather than hand it over to an insurer. Realistically these budget changes will make little difference to the average punter, whose pension pot of £50,000 or less is still most likely best used to purchase a lifetime income through an annuity.

Basic State Pension – restoring the link to earnings will help ensure that the Basic State Pension will increase ahead of inflation, and in line with the national average wage. The state pension is guaranteed to increase in 2011 in line with prices, earnings or 2.5%, whichever is the higher.

Pensions Tax Relief: those paying tax at 40% or 50% on parts of their income can currently regain that as tax relief on pensions contributions. If you pay tax at 40% and invest a £6,000 lump sum as pensions savings, you could receive £4,000 in tax relief. A 50% taxpayer investing £5,000 as pension savings could get tax relief of £5,000 (subject to anti-forestalling rules). This may all change with the budget changes on June 22nd, as higher-level tax relief is seen as a primary target for government cuts.

Income Tax: government has pledged budget changes to help lower earners by increasing the personal allowance i.e. the amount you may earn before tax. Currently £6,475, government budget proposals promise an increase to £10,000. However, there is no indication of the timing on this, it could be phased in over several years.

National Insurance: clashes over Labour proposals to hike NI contributions by 1% became one of the bloodiest battlefields for the previous administration. The Tories were extremely opposed to the 1% increase for workers, but may still impose a 1% increase for employers instead, using the increase of the tax-free allowance to £10,000 as a sweetener.

Capital Gains Tax: government budget cuts could raise capital gains tax from the current 18% to 40%, or even more on June 22nd. The annual capital gains tax exemption, meanwhile, could be cut from £10,100 to £2,000. While government is not expected to backdate these changes, it is not expected to delay them either.

Capital Gains Tax applies, not to the overall value of an asset, but to the increase in value of an asset since you acquired it. It applies to the profit you make from selling a second property, whether a buy-to-let or a holiday home, to gains from art or antiques, or to gains made from stocks and shares investments. It even applies to gifts – if you gift your home to your daughter, without a penny changing hands, there is still no escape from CGT, which will be calculated on a valuation of the property.  If you bought  a second home 10 years ago for £50,000 and can sell it now for £150,000, you will be taxed on the difference, i.e. on the profit or gain you have made – in this case £100,000. Last year you would have owed £18,000 in CGT; government budget proposals may now raise Capital Gains Tax from the current 18% to bring it closer to 40%, in which case you could soon face a tax bill of £40,000 on that house sale. This is why so many landlords have been rushing to sell their properties lately, before any such budget changes kick in.

These increases in Capital Gains Tax are primarily intended as government budget cuts to tax the better-off, but could affect many average earners too. Employees who receive shares as part of their company benefits package would be taxed at the new levels, on the gains they make from selling their shares. Government has promised to prevent the capital gains tax increase from hitting the elderly. This may protect those who have purchased a second property as one strand of their retirement planning. It may also protect residents who have been in nursing homes for longer than 3 years, who would otherwise have found that their family home was deemed to be a secondary residence, and subject to Capital Gains Tax, when they came to sell it.

One solution to CGT increases are Enterprise Investment Schemes. EIS schemes allow you to defer CGT by investing your gains for three years or more tax-free. As such, they are a ‘shelter’ from CGT for as long as you are invested in the EIS scheme.

Inheritance Tax: the original budget proposals to raise the IHT threshold to £1m are now gone, it will now remain at £325,000 for a single or £650,000 for a couple. As part of the round of government budget cuts, this may be frozen, to allow inflation to push more people over the threshold.

Venture Capital Trusts (VCTs): VCTs offer tax-incentivised investments in smaller British companies. They currently give a 30% up-front tax relief on investments of £3,000 – £200,000, although shares must be held for 5 years to retain the relief. Government budget changes may increase tax reliefs on VCTs to encourage investment in small industry, and in particular in the green technology sector, which was singled out for support through budget proposals in the coalition manifesto.

Are you interested in more information on how the budget proposals will affect you on 22nd June? Contact us now with a financial advice enquiry or ring 0800 678 5929

Pension schemes, both company pensions and personal pensions, are still regarded as the best savings option and employee benefit by UK workers, according to the National Association of Pension Funds (NAPF).

With government tax relief upping your pensions contributions by 20% on day one, pensions are recognised by workers as being far ahead of other forms of saving.

In a new survey, pensions came out as top savings option with 44% of respondents, far ahead of property (18%) and well ahead of any other form of saving.

Over three quarters of workers (77%) said they would regard a workplace or occupational pension as a significant plus point when looking at any prospective employer.

Besides salary, a company pension also came out on top as the leading employee benefit, getting the vote of 38% of respondents. A bonus (19%) and flexible working (13%) were the second and third preferred options.

While the majority of workers will make no changes to their level of company pension contributions in the next year, 17% said they would increase them, compared with only 8% who will cut their monthly pension contributions.

Workers were concerned about their retirement planning following the recent economic downturn, however. Only 34% of people said they believed their pension will give them enough money in retirement, and 27% said they would be more confident in pension saving, if it came with a guarantee against losing their savings.

Flaws in the government’s planned ‘Personal Account’ pension scheme have been highlighted by new quality standards for company or occupational pension schemes from the National Association of Pension Funds (NAPF).

NAPF has created a Pension Quality Mark based on criteria which define what a good pension should entail.

The Pension Quality Mark will be awarded to defined contribution occupational pension schemes which meet the following criteria:

• Employee contributions of 10% of salary and employer contribution of 6%
• Administration and funds management charges limited to 1% of the main funds
• High levels of clarity and ease of understanding in communications to pension fund members

The criteria which underpin the government’s proposed Personal Accounts Scheme fall well short of the above quality levels. The government’s pension scheme postulates statutory minimum contributions of just 4% of workers’ salaries plus an employer/company contribution of 3%, with 1% in tax relief on top.

Companies with pension schemes that have already qualified for the Pension Quality Mark include Marks & Spencer, Standard Life, Kellogg’s, and IBM.

An even higher quality standard is available from NAPF as well. The Pension Quality Mark Plus will be awarded to schemes where employers contribute 15% of earnings, and their company contributes the equivalent of 10%.

The government’s Personal Account Scheme will be phased in from 2012, and all UK employees not already contributing to a workplace or personal pension will be automatically enrolled into the scheme.

Employers or individuals wishing to avoid the Personal Account Scheme by making their own provision, should request advice from their financial adviser to set up an occupational pension scheme for them, before that time.

If you are a pension saver with a defined benefit pension, you should treat with suspicion company initiatives to encourage you to transfer out of your pension scheme, in return for a lump sum.

Such lump sum offers, known as “enhanced transfers”, are increasingly common as companies strive to dismantle their highly expensive defined benefit pension schemes.

This was the message this week from the Pensions Regulator, at the National Association of Pension Funds (NAPF) Annual Trustee Conference in London.

“Trustees should start from the presumption that such exercises and transfers are not in member interests. If a company is willing to encourage the transfer, the company’s gain is likely to be the member’s loss,” said David Norgrove, chairman of the Pensions Regulator.

“Our stance is in line with the [Financial Services Authority] FSA’s guidance, which reminds firms that, in reviewing such financial promotions, they will start from the presumption that such transfers are not suitable.

Talk to a pensions expert

Mr. Norgrove emphasised the need for expert guidance to evaluate so-called ”enhanced transfer” offers. “What is often not explained or understood is that the term ’enhanced’ may be misleading, as the sum being enhanced may first have been heavily discounted.”

Strong-arm tactics

Reports have been made to the Pensions Regulator of companies using pressure tactics to secure employee acceptance of  the enhanced transfer option.

These have included companies offering to pay for advice, harassment by email, phone and even home visits to speed a decision, and strong (false) suggestions that a scheme may soon be in difficulties and that it is better to ”get out now.”

A recent survey suggested that up to a third of employers with a defined benefit pension scheme may make enhanced transfer offers in the next 2 years*.

*Source: Survey of 171 UK defined benefit pension schemes by pensions adviser Hamish Wilson, 2009

 Many claimants seeking tax credits may miss out on up to £500 of their entitlements, because the Revenue (HMRC) is failing to make them aware of their full entitlements.

While backdating of tax claims is automatic for people with children, there is no automatic backdating of tax credit claims for people with no children, who were in work prior to submitting a claim – even though they are entitled to backdate for up to three months, according to the Low Incomes Tax Reform Group (LITRG).

For these claimants, backdating tax is available only if they apply for it – and they are most likely unaware of this fact.

Latest figures show that there were half a million claimants in this category on 1^st April 2009. However, claimants are not made aware of their right to backdate, the LITRG said.

Tax credit law states that a claim ‘shall be treated as made’ (i.e. may be backdated) for up to 93 days before it is received by HMRC. However, no mention of the right to backdate is included in tax credit forms and documentation, says the LITRG.

The tax credit claims form and the accompanying TC600 information notes make no mention of the right to backdate. Neither, says the LITRG, do the Revenue’s tax credit leaflets WTC 1 and the more detailed WTC 2.

“Firstly, it is clear to us that HRMC owe many tax credit claimants a lot of money for backdating payments not made; secondly it is not acceptable to continue with this policy of not telling people of their entitlements,” says the LITRG in its statement.