HM Treasury’s proposals on high earners’ pension tax relief are inflexible, will excessively restrict the UK’s working practices, and will have unintended financial consequences for other UK workers, warns Mercer.

The financial consultant is concerned that the proposals, which will encourage greater flexibility in scheme design and reduce opportunities to abuse the system, will prompt a ‘double tax hit’ on redundancy payment and pension contributions.

“We support the rationale behind HM Treasury’s plans to restrict the tax relief available on pension saving,” said Dr Deborah Cooper, head of Mercer’s retirement research group. “However, the current proposals could restrict the development of flexible working practices in the UK as well as having severe financial implications for a wide range of employees and not just those who are the target of this tax.”

Employees that have been made redundant are currently often compensated with increased cash and pension benefits. Under HM Treasury’s proposals, a ‘double tax hit’ would be experienced on the redundancy payment, if it is more than the statutory amount, and on the pension contributions.

“This is clearly not right or fair. If an employer is trying to do the right thing by its employees, government proposals mean that the taxation of these enhancements will make it financial unviable for an employee to receive benefits at a time when they need them most. To avoid abuse, a possible solution would be that, if the redundancy terms apply to a certain number or category of employees, the potential tax on any enhanced benefit should be waived,” Cooper said.

Early retirement or ill health retirement could also be impacted. Mercer said that if an employer has an established and pre-funded working practice of allowing staff to retire early or for reasons of ill-health, no additional tax should be applied. Mercer suggests instead that the factor used to test against the annual allowance would take the scheme’s normal practice into account.

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