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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