Pension changes still opaque for companies with final salary schemes

The Government has reduced the amount in pension contributions that can be made tax-free, but will not publish details of how this will work for firms with final salary schemes until after a consultation in November, said Simon Tyler, a pensions law expert at Pinsent Masons, the law firm behind OUT-LAW.COM.

The Government has cut the amount a person can put into a pension tax-free from £256,000 to £50,000 a year, a move that will result in high earners making large contributions to their pensions paying more tax.

A tax relief ceiling of £1.5 million for the lifetime value of a pension will also be introduced, replacing the current £1.8m ceiling.

The Government said that the measures would save it £4 billion a year, though it also claimed that it would affect just 100,000 individuals.

Final salary, or defined benefit (DB), schemes are more complicated than defined contribution schemes, which Tyler said could cause headaches for firms.

"Defined benefit schemes will face a challenge in implementing these changes," he said. "Checking whether the benefits accrued by a member in a DB scheme over a tax year exceed £50,000 is no easy task. Implementation would be further complicated if the Government allows tax charges to be offset against benefits payable from DB schemes."

"The Government still hasn't decided what to do on this point: it will consult in November. In any event, these changes will tip the playing field again in favour of defined contribution provision," he said.

Tyler welcomed the changes, though, and said that they were an improvement on a similar but more complex scheme proposed before this year's general election.

"The Coalition Government has listened to the respondents to the informal consultation it held on these proposals over the summer," he said. "The final proposals are certainly simpler than those put forward by the previous Government. The new annual allowance is higher than expected. The Government had indicated that it could have been set as low as £30,000."

Tyler said that the plans demonstrated concern for middle-earners who might have been caught by previous versions of the tax relief changes.

"The annual allowance offset should go some way to prevent middle earners from being caught by this squeeze," he said. "Companies will need to revisit what pension benefits they offer to high-earners. Many will be looking carefully at the alternatives to registered pension schemes."

The annual allowance changes will take effect in April 2011. The changes to the lifetime value ceiling will take effect in April 2012.