In this week’s magazine, we have a look at how changes to pensions allowances will affect those with good-sized pensions (subscribers can look at this on Thursday, but the answer is mostly badly). But along the way, I was struck once again by the huge advantages in having a defined benefits pension of any kind.
*At the moment everyone gets relief at their marginal rate of income tax, be that 20%, 40% or 45%.
From this April, the lifetime allowance for pension savings will be moved to £1.25m. The tax authorities measure the size of a defined benefit pension pot by multiplying the annual payment the recipient is entitled to by 20 times. So, only those with an annual entitlement of more than £62,500 at the moment will end up having any trouble with the new rules.
But what of those of us with no defined benefits? What if we are saving into personal pensions on a defined contributions basis? Right now, £1.25m buys an inflation-linked annuity of around £35,600 a year. You see the point.
A member of a final salary scheme gets not far off double the annual pension as someone in a defined contribution scheme before they find themselves over running the government’s new limits and paying a 55% flat tax on the excess. Enough to make a person want a job in the public sector, isn’t it?