Not in a final salary scheme? Expect a smaller pension or a higher tax bill

If you're in a defined contributions pension scheme, new rules mean you could end up with an annual pension half the size of someone in a final salary scheme.

In this week's magazine, we have a look at how changes to pensions allowances will affect those with good-sized pensions (subscribe to MoneyWeek magazine 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.

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.

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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?

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.