The government must clarify the tax treatment of lump sums paid to pension scheme members in return for giving up their benefit rights, according to consultancy Mercer.
In an open letter to the chancellor Gordon Brown and pensions secretary John Hutton, the firm said tax inspectors are allowing these lump sums to be made tax free for individuals who are no longer employed or building up future benefits.
The implications of this practiv are that the Treasury may lose up to £2bn in pension tax receipts, and there is a positive incentive for schemes to stop pension accrual, so that their employees are eligible for tax-free payments.
Tim Keogh, worldwide partner at Mercer, said: “[Mercer] is staggered that the Revenue is authorising tax-free payments and therefore creating an incentive for pension schemes to close. Is this really what the government wants?”
The policy will further hinder those employers that want to continue operating their defined benefit schemes or, if it is amended, much time and money will have been wasted by employers exploring the current opportunities, Mercer warned.
Keogh said: “This issue is so fundamental that the government should spell out its position – either it should make clear that these tax advantages are intended and acceptable, or it should set out a policy making the payments tax-neutral.”