Treasury
targets high earners' pensions
The Government's pensions reform faces
delay as row intensifies over Ј1.4m limit
By Rachel Stevenson, The Independent
17 October 2003
Britain
's
highest-paid executives are at the crunch time in the battle to save their
multimillion pound pension pots from the taxman.
Not
only are excessive salaries coming under increasing pressure, but business
leaders have also been fighting against proposals from the Treasury to put
a "lifetime limit" of £1.4m on the amount of money they can
have in their pension fund by the time they retire. Any savings above that
limit, at the time of retirement, would be subject to a highly punitive
tax take. The limit would affect all pension savers, including those who
do not contribute to their schemes.
For
the vast majority of the population, this limit poses no threat. But a
very powerful lobby of high earners are going straight to Number 10 to try
to have the limit raised. They will find out at the pre-Budget report how
sympathetic the Government has been to their plight.
Under
the proposals, anyone retiring with a fund of more than £1.4m will have
33 per cent immediately swiped on the excess. The remainder of the excess
will be taxed as income at a 40 per cent rate. This amounts to a 60 per
cent tax on any funds saved above £1.4m, which business leaders say is
too severe and discourages pension savings.
The
£1.4m lifetime limit was put out for consultation by the Inland Revenue
last year, but the proposals have been delayed as the Prime Minister and
the Chancellor wrangle over the issue. Captains of industry went to
Downing
Street
a
few weeks ago to bend the ear of Tony Blair, arguing the change will make
Britain
a
less competitive place to work for top executives than other countries.
"The
£1.4m limit is too low and we have been lobbying the Government to have
it raised," a CBI spokesman said yesterday. "We have been quite
pleased by the feedback we have had."
The
issue has even roused the attentions of senior judges, who have also taken
the unprecedented step of lining up to formally argue against the limit.
But the Treasury insists the limit will affect only 5,000 people and is
justified to make the pension system fairer and easier to understand for
all.
Mercer
Human Resource Consulting, however, has estimated that up to 600,000
people will be caught by the limit in 15 years' time and it is now clearly
proving a more thorny issue for Number 10 and Number 11 to resolve than
they had anticipated. A meeting between representatives from the
engineering industry and policy advisers at Number 10 took place only this
week, at which the Prime Minister's office was said to be desperate to
find some way of compromising on the limit without appearing to back down
entirely.
Stewart
Ritchie, pensions development director at Scottish Equitable, said
yesterday: "The theory is that the limit will simplify the tax system
that governs pensions. There are, at present, eight regimes covering
pensions, and the Government wants to bring this down to one." But he
backs the directors who say the limit is at present too low.
High
earners, such as Sir John Bond, Niall Fitzgerald and David Prosser, who
have already accumulated far in excess of the £1.4m cap, will have their
existing funds ringfenced and will receive the same tax treatment they do
now. But if they make any more contributions to their fund, these will be
subject to the new tax penalty.
While
the lifetime limit is a radical step in simplifying pensions, it is not
the first measure to curb payments. Nigel Lawson introduced the
"earnings cap" in 1989 for any new joiners to schemes. This
limits the pension anyone can receive to that from a salary of £99,000 a
year. The lifetime limit is designed to sweep away the complexities of the
annual earnings cap.
The
£1.4m figure came from calculating the size of pot needed to produce a
pension income of £65,000 a year - roughly two-thirds of the earnings
cap. But according to Standard Life, the pension company, current annuity
rates mean that a fund of £1.8m is now needed to produce a £65,000 a
year income. It, along with many other pension companies such as Scottish
Equitable, has told the Government to lift the limit to between £1.8m and
£2m.
Although
outrage over excessive boardroom pay has never been higher, some
consultants believe the limit will in fact only make executives bargain
for even higher packages.
Deborah
Cooper, senior research actuary at Mercer, said: "Most senior
executives look at their pay as a total remuneration package. It is
unlikely that they will want to accept a lower total benefits package and
will want other forms of benefits to make up for it. This could include
higher salaries and higher bonuses."
The
Engineering Employers Federation (EEF) is extremely concerned that the
limit will alienate directors from their company pension scheme and make
them less likely to keep pension arrangements for the rest of their
workforce.
Final
salary schemes, where staff are guaranteed a level of pension on
retirement, are being shut down at an accelerating rate as they become too
expensive to run. David Yeandle, of the EEF, believes the limit will only
serve to distance executives even further from their company pension
schemes.
"Why
not let people save more than £1.4m without the harsh tax system, as long
as they are saving in a pension scheme that is open to all staff on the
same terms," Mr Yeandle said. "This would put everyone on the
same footing and would create a greater degree of encouragement from
senior management to look after everyone's pension scheme."
The
Government has also come under pressure to link the limit to earnings,
rather than to retail prices, as it first suggested. "Earnings rise
faster than prices and tax relief given to pension contributions is based
on earnings," Mr Ritchie said yesterday. "There will be a
gradual creep where more and more people are affected."
But
that will be a very difficult political point to swallow for the
Government, as it has so far resisted restoring the link between the basic
state pension and earnings. Mr Blair would not want to be seen to give
benefits to "fat cat" businessmen that he will not give to the
poorest, oldest members of society.
Another
issue of contention is that the limit applies to the cumulative value of
the fund at the time of retirement, including all investment gains. Unlike
contributions, these are difficult to predict and people could find that a
sudden rally in the stock market near their retirement could push them
over the limit through no action of their own. This, the pensions industry
has argued, will make pension planning extremely difficult.
Adrian
Boulding, of Legal & General, said: "What if we get the good
times again? People will be taxed heavily inadvertently on the success of
their fund manager."
However,
the Treasury is, so far, showing little inclination to budge. Yesterday it
said it stood by its original proposals. But nothing concentrates the
minds of civil servants and policy advisers like a threat to their own
pension, so this battle looks set to go down to the wire.
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