Pensions - Articles - Budget has thrown up inconsistencies in pension outcomes


Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that yesterday’s Budget has produced potential inconsistencies in pension outcomes.

 Removal of National Insurance for under-21s has perverse outcome for pensions
 Lynda Whitney, partner at Aon Hewitt, said:
 “The removal of National Insurance (NI) for those under the age of 21 will have a perverse outcome for pension savings. Most pension schemes now use salary sacrifice so that pension contributions are NI free as well as tax-free, cutting the cost to the member of pensions saving.
  
 “Unfortunately, this NI benefit will no longer be available to those under 21. This will increase the cost of pensions savings by 12% for a typical person under the age of 21.
  
 Inconsistency between DB and DC Lifetime Allowance
 Lynda Whitney said:
 “There is a stark inconsistency between the effects of the new Lifetime Allowance (LTA) of £1 million on defined benefit (DB) and defined contribution (DC) pensions.
  
 “In the DC world, £1 million may buy an increasing pension of only around £25,000pa, while in the DB world you are allowed a pension of £50,000pa without breaching the Lifetime Allowance (LTA). This is because HMRC uses a fixed factor of 20 to calculate the LTA for a DB member and you cannot currently buy £1pa of increasing pension for anything like as low as a £20 premium.
  
 Lynda Whitney continued:
  
 “If this inconsistency is not resolved we could see the development of middle and senior managers wanting to join a DB scheme just to ‘bed & breakfast’ their pensions in order to get the higher tax allowance.
  
 “It’s also worth bearing in mind that the LTA now limits DC pensioners to an income which is probably below the national average earnings for full-time employees (£29,536pa).”

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