The impact of tax policy on employer sponsored pension provision
The Actuarial Profession sponsored the PPI to examines the subject of pensions tax policy and explores both the direct and indirect impact that changes in successive Government’s tax policy over the past thirty years have had on employer pension provision. This report also looks at the proposals that have been made for the future direction of tax policy for pensions and assesses their potential impact upon individuals and the costs to the Exchequer.
Chapter one explores changes in the taxation of pensions in context of the wider developments that have shaped the pensions landscape over the last three decades. Government policy, regulation, social change and the economy have all left their mark on pension provision and take-up. Some of these changes have led to greater uncertainty, higher costs and lower returns for pension schemes.
Chapter two of this report sets out the current regime of pension taxation and examines how the tax treatment of pensions has changed over the past 30 years. This chapter explores the rationale for changes to pension taxation and the direct and the cumulative impact that changes have had on employers and scheme members. This chapter concludes that whilst the direct and immediate effects have centred on the costs of implementation, and have at times had a beneficial impact on scheme funding, the longer term, indirect and unintended consequences may also have contributed to a 30 year decline in employer provision.
Chapter three considers how the reforms proposed by the Coalition Government in 2010 could affect higher earning individuals, in particular highlighting the different effects for those in Defined Benefit schemes compared to Defined Contribution schemes and the outcomes for different generations of employees. The findings suggest that the tax charge for some high earners in Defined Benefit schemes could lead them to opt-out of employer sponsored pension provision, potentially increasing the pressure on employers with Defined Benefit schemes to restructure pension arrangements.
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