Whose benefit is it anyway?

changes to pension terms and their final payout are going to hit high-earners,
especially if they plan to retire early. Check executives’ packages to avoid disappointment.  Susan Thomas-Green reports

April 2005 the capital value of pensions from approved schemes is intended to
be capped at £1.4m – a point that will affect many senior executives. And
while many executives will probably have heard about this particular change, it
is not the only one in line.

of the Department for Work and Pensions (DWP) proposals, which will come into
effect by 2010, is to raise the minimum age to 55 from 50 at which a pension or
lump sum can be taken. Only those retiring on ill health grounds will be able
to access their benefits before then.  

who previously had service agreements entitling them to retire from age 50,
perhaps on redundancy or a change of control, will need to review the
protection they have – as should anyone focussing on voluntary early

those who want to remain employed but to scale back to part-time or to a
consultancy arrangement, the Government proposes to allow members to take some
or all of their benefits in advance of full retirement. 

the past, complicated arrangements have been needed to ensure the original
full-time employment has ceased and a new, different employment has commenced.
When not carried out very carefully, such arrangements have been challenged by
the Inland Revenue. Fortunately, this process should become much easier.

the other hand, only minor changes are proposed for those who never want to
retire. The existing requirement to take benefits by age 75 will remain.

changes are being proposed to protect members of final salary schemes that
wind-up. One such change is a plan for a Pensions Protection Fund from
2005 that will pick up the pensions tab if the employer becomes insolvent from

the Government sees scope for management to abuse this fund, deliberately underfunding
the pension scheme in the knowledge that the fund will provide members’
pensions if the scheme cannot.

prevent this, it proposes to cap the maximum amount guaranteed by the fund
equivalent to the pension expected by those on a final eligible salary of
between £40,000 and £60,000. In this case, the higher paid will face a
greater risk of losing part of their pensions than all other employees.

may well give impetus to the establishment of separate top-up schemes for
executives and others on higher salaries funded on a more secure basis.

with regard to the £1.4m limit: the current complicated limits on the amounts
of benefits and contributions will be abolished, to be replaced by a single
limit on the amount of pension saving that will qualify for tax relief. 

Inland Revenue intends to set that limit at £1.4m, which it considers is
broadly equivalent to the maximum pension a man of 60 who joined the scheme
after 1989 can get from an employer’s occupational scheme.

will, of course, have a disproportionate effect on female high earners as
annuity rates for women are lower than for men because women, statistically,
live longer than men. 

Inland Revenue believes only a very small number of people will be affected by
this limit, but most commentators disagree and believe the number of people
affected will be considerable.

the moment, the Inland Revenue has yet to flesh out the details of its
proposals. It appears that schemes can opt out of the new regime but it is not
yet known how they or existing unapproved arrangements (which exist mainly for
senior executives who joined their present company after 1989) will be taxed.

is to be a limit of how much additional benefit can be earned in a year of
£200,000. This will replace the old limits on contributions for both
employers’ occupational and personal pension schemes. 

is most likely to impact on an executive in a year in which he or she is
promoted – which can have a major impact on the value of his or her past
service benefits under a final salary scheme – or earns substantial
bonuses. Again, whether an unapproved pension arrangement may provide a
relatively tax-efficient alternative is unclear.

are to be transitional arrangements to protect executives whose pension funds
already exceed £1.4m and executives who may be affected should be starting to
take advice now. For some, it may be beneficial to take benefits before or
at the point when the new regime is introduced.

executives whose funds already exceed the new limit will not be able to earn
any more pension benefits after the new regime comes in. Unless they
renegotiate terms with their directors or remuneration committees the overall
value of their compensation package may decline sharply.

overall, the new proposals are unlikely to be beneficial for most high-
earners. The main definite piece of good news mentioned in the various
green and white papers discussing the changes is the section setting out how
long people are likely to live in retirement. In 1960 a man of 65 could
expect to live another 12 years; now he can expect 16 years and by 2025 it will
be more than 18 years.

Thomas-Green is a partner in the pensions group at Pinsents

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