Mercer warns pension tax-relief proposals could accelerate demise of DB

UK - Mercer has warned that current proposals for pension tax relief could accelerate the demise of defined benefit (DB) schemes in the UK.

Deborah Cooper, head of the consultancy's retirement research group, said the tax system should encourage saving through corporate pensions, rather than penalise it for short-term tax purposes.

The government is currently expected to lower the annual allowance from £225,000 to £30,000-£45,000, with Mercer in favour of a middle ground of £40,000.

Cooper said: "Certain elements of the current proposals will accelerate the demise of defined benefit occupational pension schemes unless changed.

"Otherwise, employees on incomes just above the higher rate tax threshold could inadvertently become liable for tax charges greater than the amount of pension they have actually accrued."

Cooper argued a reduction of DB schemes would lead to a loss of retirement savings, while leaving those who are still saving to old age to shoulder greater risk.

She also warned about the risk of discouraging senior management from saving for pensions.

"Hit those in companies who make the decisions on pensions, and you undermine enthusiasm for the whole regime, to the detriment of us all," Cooper said.

Mercer argued that introducing a penal tax law would end up attacking DB provisions and that adding complexity and further costs to maintaining the schemes would discourage employers to act in employees' best interests.

The company called for the annual allowance not to be applied retroactively, while saying that the reduced annual allowance should offer a charge in line with the person's marginal tax rate.

Cooper said: "If the government's proposals go through unamended, in some schemes the majority of members will find themselves exposed to an unpredictable and inequitable tax regime."