Lowering the annual pension contribution allowance to £40,000 could persuade some middle-management public servants to take up career average schemes to avoid harsh tax penalties, pensions expert Tom McPhail says.
Tom McPhail, head of pensions research at Hargreaves Lansdown, makes the prediction ahead of the Treasury announcement of the new annual allowance on Thursday.
As part of a raft of pension reforms, the government is considering reducing the annual allowance from £255,000 to between £30,000 and £45,000.
Last week, Lord Hutton's report on public sector pensions recommended a move from final salary pension schemes to career average schemes to cut costs to taxpayers, which would see many public servants lose thousands from their pensions.
A new, lower annual allowance, McPhail says, could mean civil servants facing pension income cuts could actually get a better deal from career average schemes.
"Scheme members with substantial pension benefits accrued run the risk of breaking the annual allowance if they get a pay rise," McPhail says.
This is because currently, scheme members' benefits are calculated using only the salary of their last year's service.
Under this system, a civil servant with 25 years service who receives a pay rise from £50,000 to £60,000 could be eligible for a pension pot worth £80,000, which means all contributions over £40,000 would be taxed at 40%.
A career average scheme calculates pension entitlement based on the salary received in each year of service, so whilst pension payments will be lower, scheme members may avoid breaking the £40,000 allowance and thus the 40% charge.
"Career average scheme members are less likely to be affected by the annual allowance change," McPhail adds.
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