Wednesday, 5 December 2012

Average earners hit by pension limit?

How could someone on an average wage be hit by a reduction from £50,000 to £30,000 in the amount that can be saved each year into a pension scheme?

Well, it could happen but most would escape.

Take, for example, an employee on an average wage of £25,900 with 15 years in a nice final salary pension scheme.

That means the pension is a proportion of final salary, possibly building at 1/60 of salary for each year worked. The tax office multiplies each year's gain by 16 to see if it exceeds the annual allowance - the one which could drop to £30,000.

Our example would have to gain more than £1,875 in a year to breach the limit.

Unlikely? Yes, but say the person was promoted to a management job on £35,000. In that case there would be a sudden gain in pension entitlement achieved in just one year.

By my calculation it would be £2,858.

Our employee would have to pay a tax charge the part of the gain which exceeded the annual limit. In this case it would be a charge of £196.

BUT - and this is a big BUT - everyone is able to deploy unused annual allowance from the previous three years.

Those on medium and even many on higher wages are likely to have plenty of allowance to spare. In which case they could escape the tax charge.

Nowadays, more people on being signed up to pensions which aren't guaranteed by their employers. All that happens is that the employee and the company put in some money in a pension fund each month - and the pension you get at the end just depends on how well the fund does.

The situation is a lot simpler for these employees. Their contributions, including company contributions, would have to exceed £30,000 a year, which isn't likely to worry most of them.

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