An Annex sets out the methodology and assumptions underpinning the Government's modelling of fiscal yield from reform of pensions tax. It also sets out some of the trade-offs between variables to achieve that yield, for example the level of the AA and how DB scheme accruals would be valued.

Written submissions on the specific issues discussed in this document (summarised in Chapter 5) are welcome by 27 August 2010. Before then, there will be a period of informal consultation of which this discussion document forms a part. This month the Government has met with scheme administrators, experts and industry representatives to take views on key aspects of policy design. Slides from these workshops and other supporting documents are available to download from the Treasury website.

The Government expects to confirm its intended approach by the end of September 2010, with draft legislation to follow "in the autumn". If it decides that the alternative approach of reforming the AA will meet its objectives, then it will repeal the legislation passed in Finance Act 2010 (April). The new restriction of pensions tax relief rules will take effect from 6 April 2011 and be legislated for in the Finance Bill 2011.

Aries Comment

It was already known that the Government considers the Annual Allowance would need to be reduced to somewhere between £30 - 45k to glean the same amount of tax as the HIER charge was expected to deliver (cf. the NAPF's advocacy of £45 - 60k; the Government has cleverly adopted the industry's basic idea, but slashed the limit). The new condoc suggests the limit should be set at £40k. Instead of attracting an Annual Allowance Charge of 40%, contributions in excess of the limit would simply not receive any tax relief.

The present exemptions from the AA test for individuals claiming enhanced protection (provided EP is not lost) and generally in the year before benefits come into payment will be removed. Magnanimously, on the other hand, the Government concedes there is little risk of tax avoidance in that final year on the part of individuals who actually die or are given less than a year to live, and proposes to exempt these cases from the AA test. No concessions on ill health early retirement or redundancy are proposed, however.

In addressing the difficult but crucial issue of how to value DB contributions, the condoc recognises the importance of fairness against DC schemes, and also of balancing this against the need for a solution which is reasonably simple to administer. Consequently it plumps for sticking with a flat-rate valuation factor, but in the range 15 - 20 instead of the present 10, which is regarded as underestimating the full actuarial value. Open questions include whether deferred members should be excluded from the scope of the regime.

A dramatically reduced AA will, of course, affect many more individuals. As an example, if the factor were to be 20, a DB scheme member with 10/60ths accrued pension at the start of the year whose pensionable earnings went up by 13% from £50k to £56.5k - hardly among the highest earners ostensibly targeted by the policy - would be caught by the proposed new AA. The Government hopes that innovations in scheme design, for example capping or smoothing accrual, or making part of a pay rise on promotion non-pensionable, might be deployed to keep DB benefits within the AA.

Among other issues raised in the condoc, it is proposed to retain the system which requires reporting excess contributions via the Self Assessment return. Many more individuals could be caught and so need to be informed of their pension input amounts. The Government is considering placing an obligation upon scheme administrators to provide this information.

IHT Avoidance