Five pension changes in the Pre-Budget Report

As we start to pour over the detail in the Pre-Budget Report, our initial reaction is that pensions appear to have escaped quite lightly.

There were several pension announcements within the Chancellor’s speech and the report. Here they are:

1 – The basic State pension will increase in value by 2.5% in April 2010. It was important to confirm this because the Retail Prices Index (RPI) measure of inflation is currently in negative territory and it is this figure that is used to inflate the State pension. In fact, the 2.5% increase was already written into legislation so pensioners had nothing to worry about in this respect.

2 – The current rules for higher rate income tax relief on pension contributions remain unchanged, but some changes were made to the anti-forestalling measures introduced in April to effectively cap this higher rate relief for higher earners. Employer pension contributions will now be included in the definition of earnings, bringing some people who earn £130,000 a year (rather than the previous £150,000) under the scope of the anti-forestalling measures.

3 – State contributions to many public sector pensions will be capped from 2012, leading to a saving of some £1bn a year. There was comparison made in the speech between public and private sector pensions. Bringing the public sector into line with the private sector in terms of the retirement benefits could lead to substantial reductions in pension values for those in the public sector schemes. The Report also announced that those in the public sector earning more than £100,000 will have to contribute more to their pension scheme to retain the same level of benefits.

4 – Personal Accounts, a new national system of opt-out pension schemes with compulsory employer contributions will have their introduction delayed. This could save between £1bn and £2bn in tax relief but does lead to more uncertainty that they will ever be introduced in their current format.

5 – The 0.5% increase in National Insurance contributions from April 2011 for employers, employees and the self-employed is likely to make the ‘salary sacrifice’ method of making pension contributions look even more attractive.