Managing Your Money 

Another raid on final salary schemes

The budget notes revealed that £640 million (almost half the tax revenue lost by this April's £1,000 increase in the personal allowance) will be recouped in 2012-13 through pension-related changes to National Insurance, penalising members of final salary pension schemes.

At the moment, if an individual is contracted out of the state second pension via a defined benefit occupational pension scheme, the employer and the employee's National Insurance Contributions (NICs) are reduced in total by 5.3 per cent. But from April 2012 the NICs reduction will only be 4.8 per cent, the difference raising £640 million.

Also, the Budget documentation indicated that defined benefit pension schemes will soon be unable to contract out of the State Second Pension at all, leading to more employers closing these schemes to existing members.

John Ball, head of UK Pensions at Towers Watson said: "The rebates for each defined-benefit member can be worth up to £1,285 for employers and £556 to employees next year. They were due to fall in future anyway, and do not adequately compensate employers for the risks they are taking. But removing them altogether will leave employers with no option other than to redesign their schemes."

Meanwhile, the government confirmed that the state pension for future pensioners will become a flat rate pension worth around £140 a week. A Green Paper on options for reform will be published shortly.

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