# How will the new 0.6% pension fund levy work?



## ajapale

Proposed 0.5% Pension Tax: Is this pension contribution or pension fund tax?

If its a fund tax how will it be applied to under funded db schemes?


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## Gervan

It sounds like a tax on the value of the fund. My pension fund is now worth less than half the amount I contributed, now it seems the rest will slowly be siphoned off. I guess the defined benefit schemes will suffer the same fate, but the employer will be forced to increase contributions.


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## boaber

Yes looks like it will also apply to DB schemes

[broken link removed]

Note it's only going to be applied to private pension provision


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## ajapale

Thanks



> *Levy Proposal *
> 
> 
> An annual levy of between 0.5% and 0.6% of the pension scheme assets of all pension savers including savings in occupational defined benefit and defined contribution schemes, approved retirement funds, retirement annuity contracts and PRSAs.
> This levy will be applied for *a minimum* period of 4 years from 2011 to 2014 and is intended to raise €450 million per annum over this period.
> The Government intends to enact new legislation which will permit the benefits of pensioners in defined benefit pension schemes to be cut.
> This measure is solely being targeted at private sector pension savers - there will be no levy on long term savings accumulated through other vehicles or the benefits provided to members of unfunded schemes including the €130b of public sector pension's commitments. The proposal appears to completely exempt these groups for this new tax.
> *Note to the Editor*
> *About IAPF*
> Established in 1973, the Irish Association of Pension Funds (IAPF) is a non- profit, non-commercial organisation whose aim is to promote financial security for all retired people.


Will the pension fund tax apply to public sector _*funded*_ DB schemes such as ESB, Bord na Mona, Bord Gas etc? Some of these funds are in defecit.


Will the pension fund tax apply to distressed private sector DB schemes?


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## thedaras

As far as I know this will only apply to private pensions..


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## Conan

Presumably the proposed Levy will apply to funded semi-state schemes (such as ESB etc). It seems that unfunded schemes escape the Levy, mainly -but not exclusively- civil servants. It might be argued that working Civil Servants have made a contribution (the increase in their pension contribution - though that is arguable) but the group that seems to escape entirely is retired civil servants and retired politicians whose pensions are not paid by annuity but rather out of the public purse.  

For those in DC arrangements, the effect of the proposed Levy will be to increase the typical annual fund management charge from say 1% p.a. to 1.5% p.a. for at least 4 years. For those in DB schemes it is less clear how the Levy will impact on members benefits (unless they/employer simply pay an additional contribution directly to the Revenue). In the case of ARFs it would seem that the ARF provider will simply reduce the fund value by 0.5% (in addition to the 5% p.a. drawdown that the individual must take each year - and pay tax on). This will put ARF under greater pressure of running out of funds in older age.

It seems life my mother was right all those years ago - "a good pensionable job in the Civil Service".


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## ajapale

Conan said:


> Presumably the proposed Levy will apply to funded semi-state schemes (such as ESB etc).


 
Yes, I cant see how the government could discriminate between:

A)funded commercial semi state DB schemes.
B)funded former semi state DB schemes.
C)funded private DB schemes.


I know that some distressed DB schemes have upped employee contributions in recent years and some benefits have been curtailed.

Also since these schemes are final salary schemes current employees who have or will endure pay cuts will presumabley be retiring on pro rata reduced pensions? Is this interpretation correct?


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## ajapale

T McGibney said:


> ..which if implemented will undermine the entire rationale behind saving for retirement.


 

I agree.

May I suggest that we keep this thread to discuss the detailed mechanics of the of the proposal and its impact?

I wouldnt like to see the discussion degenerating into another Public/Private sector ding dong.

It appears to me that substantial parts of the public sector (and former public sector) will be impacted (funded DB schemes).

The other huge area impacted is employees in private dc schemes.

Yes the proposals as I understand them do not impact on Civil and Public *Servants*. And (as yet) people who have made alternative or no provisions for retirement.


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## Sunny

How will it work on DB schemes? Easy to impose on a DC scheme because the value of the fund is clear. That's not the case with DB schemes many of which have basically a minus value.


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## ajapale

Do we have any concrete details of the proposals other the Irish Association of Pension Funds (IAPF) press release? While it is far better than nothing they have a legimate interest in defending their various stakeholders. For instance Im not sure about the assertion that "This measure is *solely* being targeted at private sector pension savers".

Also I think the government should be aware of the "law of untended consequences" when enacting the proposed new pension fund tax.


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## Don_08

Michael Noonan will provide full details on Tuesday.


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## Sunny

Don_08 said:


> I think you are confusing deficit/surplus with assets.
> 
> Plenty of DB Schemes have liabilities in excess of their assets - but they all have assets, and substantial ones.
> 
> This tax is a disgrace, is there any guarantee they will still not implement the reduction in tax relief over the next few years in addition?



The value of a DB scheme isn't simply the assets in the fund as of today though so is this a tax on assets or values?


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## Don_08

It states pension scheme assets in the press release.  Devil will be in the detail when Michael noonan announces it.


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## ajapale

Don_08 said:


> Michael Noonan will provide full details on Tuesday.



The IAPF clearly have had some sight of the proposals and are setting out their stall. Do we have any idea whether any other "interests" been informally consulted.


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## Brendan Burgess

I have moved all the Letting Off Steam posts to a new thread. The new pension levy is a disgrace!

Please confine your posts on this thread to the mechanics of the scheme. 

Any posts with commentary will just be deleted from now on.


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## Duke of Marmalade

There are three ways in which a private sector person actually receives their pension.

(1) DB pension from their employer
(2) ARF
(3) An annuity purchased from a life company

To be consistent all three should be subject to the levy and in the case of (1) and (3) the employer/insurance company should be empowered by law to reduce its payment to the pensioner.


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## ajapale

Tangential posts relating to the existing *public service* pension levy moved here: €2.3M fund cap applies to the notional value of DB Public Service pensions.


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## Duke of Marmalade

Further thoughts

If this is to be applied fairly to DB members, this is what will be required.

Existing pensioners: 0.5% reduction in pension for 4 years 

Active members: 0.5% reduction in accrued pension for 4 years; 0.5% reduction in 2012 accrual for 3 years etc. no reduction for accruals after 2014

Yes, I can see job creation alright, in pension administration departments


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## Aerohog

Duke of Marmalade said:


> Further thoughts
> 
> If this is to be applied fairly to DB members, this is what will be required.
> 
> Existing pensioners: 0.5% reduction in pension for 4 years


 
For existing pensioners, this would be a 0.5% reduction each year for 4 years, so that after this time your annual pension would be 2% lower. If your pension starts at 10,000, it would then drop to 
9950.00
9900.25
9850.75
9801.50
9801.50
9801.50
etc.

Also, will the levy apply to pensions (annuities) from DC schemes?


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## ajapale

Interesting but tangential discussion concerning non commercial semi state schemes moved here:

List pub service DB schemes non commercial semistate exempt from the funding standard.

If these public service schemes still have a ring fenced (all be it in defecit) fund then I would expect the new pension fund tax to apply to them equally.


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## ajapale

thedaras said:


> Looks like it may be challenged
> [broken link removed]


 


> Jerry Moriarty, IAPF director of policy, confirmed legal advice had been sought on the basis the levy could be an interference with property rights. There is also a question of discrimination given that *only private sector pensions would be affected.*


 
I dont think the provisions can be challenged on the grounds that the measures only apply to private sector schemes since it appears to me that the very large schemes in the ESB and other funded public sector superannuation schemes will be effected.

It is of course impossible to place a pension fund levy on an unfunded scheme as there is no fund to levy!

But this raises a question: is it possible to raise a levy on an under funded scheme or scheme in defecit? And if it is where is the cut off 90%, 80%, 20%, 10%, 5%...? The public service unfunded schemes are equivalent to a funded scheme with no funds (0%) in it!


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## StevieC

Since DB schemes are pooled arrangements its quite easy to deduct the 0.5% levy, the charge is just deducted from the overall scheme value each year regardless of whether the scheme is in surplus or deficit.

Whats harder to qualify is who is ultimately going to pay the levy.

Since all DB schemes are effectively subsidised by the employer the additional cost will be born by the employer unless the employer decides to change the scheme rules. This would be unlikely given the extra headache of calculating each members notional value of whatever their share of the pool is worth and asking the member to pay this. The alternative would be even more complex, ie; reducing the members pension at retirement to allow for the levy, as this would mean ringfencing all the affected employees for that were employed for the 4 years the levy will be in operation and treating anyone who joined the scheme after differently. 

I can see the fund just paying the levy and either the employer taking the hit or ultimately like what happens many DB schemes, the scheme is wound up with a deficit of funds and the employees get reduced pensions based on their share of whatever is left in the pot.


www.CheaperLifeAssurance.ie


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## ajapale

Hi Stevie,

Thanks for that well written piece.

Could the DB scheme rules be changed to take say an extra 0.5% in employee deductions?

aj


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## Aerohog

Yes, but there is a big difference between 0.5% of payroll and 0.5% of the fund.


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## ajapale

*Anyone a link to the Ministers actual proposal wrt the 0.6% pension fund levy?*

Does anyone have a link to the Minister's actual proposal with respect to the 0.6% pension fund levy?

Im not interested in the other proposals just the pension fund levy. 
thanks
aj


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## T McGibney

> Pension Levy
> The various tax reduction and additional expenditure measures which I am announcing today will be funded by way of a temporary levy on funded pension schemes and personal pension plans. I propose that the levy will apply at a rate of 0.6% to the capital value of assets under management in pension funds established in the State.
> 
> It will apply for a period of 4 years commencing this year and is intended to raise about €470 million in each of those years. The levy will not apply to pension funds established here and providing services and benefits solely to non-resident employers and members. Further details regarding the proposed application of the levy are set out in the Summary of Initiative Measures.
> 
> I am conscious of the concerns of the pensions industry about the impact of a levy in circumstances where the pensions sector, in common with other sectors in our economy and society, is finding the current economic and financial environment very challenging. However, the imposition of the levy is for a relatively short period and its purpose is to improve that environment by providing the means to encourage job creation in areas of our economy most likely to deliver that employment quickly.
> 
> The levy is being confined to pension funds because I believe that the alternatives for increases in taxation elsewhere at this time would be more damaging to the economy. I will be glad to consult with the pensions industry on the legislative provisions which will give effect to the levy so as to seek to minimise, where possible, any unnecessary difficulties which this measure may give rise to.
> 
> The pension levy represents a very significant contribution by the pensions industry and the many individual savers it represents to our commitment to getting the economy moving again. I am aware that the pensions sector is also concerned, given the temporary levy, about the commitment in our agreement with the EU/IMF to reduce the tax relief on pension contributions starting next year. I will examine this issue in the context of the results of the Comprehensive Review of Expenditure currently being undertaken by the Minister for Public Expenditure and Reform, and any resulting scope for fiscally neutral changes to the EU/IMF agreement.



From http://finance.gov.ie/documents/publications/reports/2011/Jobinitiative.pdf

My blog now lists a summary of the main tax measures announced today.


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## ajapale

Thanks Tommy,

aj


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## Duke of Marmalade

We know no more.

Will it apply to ARFs?

Will it apply to annuities in payment?

Most importantly how much power will DB Trustees be given to pass this on to its members and will these members be treated fairly as between Actives, Deferreds and Pensioners?

Will it apply to funded semi State sector schemes?

He has not ruled out reducing pensions contribution relief, which was the quid pro quo that the industry lobbied for.


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## ajapale

Will the pension fund levy apply to DB schemes? 

Will the pension fund levy apply to funded public sector DB schemes (ESB)?

Will the pension fund levy apply to funded former public sector DB schemes (Eircom, AerLingus)?

Will the pension fund levy apply to distressed/in defecit private sector DB schemes?


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## theresa1

This new levy is as clear as mud!


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## KarlC

This will be very interesting to see how they operate this in relation to ARFs. I have been told all year  by revenue that ARFs are not deemed Pension funds but individual assets. I had an issue in relation to PRSI being charged on an ARF and this was the response i got. Annuities on the other hand are deemed/classified as Pension funds so lets see what develops. I for one will be watching closely..


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## DerKaiser

KarlC said:


> Annuities on the other hand are deemed/classified as Pension funds so lets see what develops. I for one will be watching closely..


There is no consistent measure for the market value of funds on an annuity in payment so I doubt they will be included.

ARFs can be converted to annuities at any point so they shouldn't be included (but possibly will).

Active pensioners in pension schemes can take a transfer value and purchase an annuity with their benefits, so it seems inconsistent to tax them (but they probably will be subject to it).

Say a company took a responsible measure and injected €40m to address a pension deficit, it will pay €1m in extra taxes over the next 4 years for doing right by its employees.


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## KarlC

ARFs cannot fall under this levy as the revenue this year wrote to me and confirmed the following:
"*Unlike Annuity products, ARFs are not Pensions, but are tretaed as assets".*

Their words not mine...


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## StevieC

My take on it based on interviews I have heard and yesterdays proceedings is;

DB pensions will definately be hit, regardless of surplus/deficit positions.

I believe that this levy will apply to semi state DB and former semi state DB schemes. In the case of semi state DB schemes, these already have had deficits topped up by the taxpayer, I can see taxpayers ultimately paying this levy either through higher service charges (ESB and the like) or by direct intervention from the public coffers. There is no reason why former state schemes would be treated any differently now to any other private DB schemes.

ARF's will be hit in my opinion. There is no mention that people who have reached retirement age have a get out of jail free card.

People in receipt of pension annuities could be hit, the maturity value of pensions is typically used by companies to buy gilt funds to pay for peoples pensions, there will be notional values somewhere kept by company actuaries to which this levy could apply. I would welcome if anyone could show me a quote that says otherwise.


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## JoeRoberts

Another headache looms for employers that operate both DB and DC schemes.
If employer takes the hit on the DB scheme it will be unfair to employees who will suffer the hit on DC schemes.


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## boaber

Looks like it will only apply to occupational pension schemes, Retirement Annuity Contracts and Personal Retirement Savings Accounts (and not to ARFs).  

It also looks like it is up to the Trustees/Pension Provider to pay the Levy and it is then up to them whether or not to pass on the levy to the member.

Dept of Finance have published some FAQs http://www.finance.gov.ie/viewdoc.asp?DocID=6830

Full details to be included in the Finance (No. 2) Bill which is being published on Thursday 19th May 2011


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## roker

I have been receiving an Annuity for about 2 year now, will this effect existing Annuity (pension)  converted from a DB scheme? They are already taking USC off it.


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## boaber

roker said:


> I have been receiving an Annuity for about 2 year now, will this effect existing Annuity (pension)  converted from a DB scheme? They are already taking USC off it.



I don't think it applies to annuities in payment?



> A levy of 0.6% on the *market value of assets under management in pension funds *and pension plans approved under Irish tax legislation is being introduced to fund the Jobs Initiative. The market value will be determined as at 1 January 2011. This will be a temporary measure for a 4 year period.


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## Slash

boaber said:


> Looks like it will only apply to occupational pension schemes, Retirement Annuity Contracts and Personal Retirement Savings Accounts (and not to ARFs).
> 
> Dept of Finance have published some FAQs http://www.finance.gov.ie/viewdoc.asp?DocID=6830



It appears to me (correct me if I am wrong) that the 0.6% levy will not be applied to existing annuities. So, if your fund has been used to purchase an annuity, you're in the clear. This would make sense.


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## Sunny

Most DB schemes fund annuities out of the funds so it will be up to the schemes as to whether they will pass on the levy or not.


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## Duke of Marmalade

_Prima facie_ it looks like DB pensioners (i.e. those actually receiving a pension) will be hit but DC pensioners will escape (they either receive an annuity or have an ARF).

Is that fair?


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## DerKaiser

Probably not - could the DB Pensioners get a transfer value and purchase an annuity from a 3rd party to avoid this tax?


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## Sunny

The problem is that the levy hits the fund and not the pensioners. The Government have passed the buck by saying it is up to the Trustees and administrators to decide if they want to pass the levy on. Most funds won't have a choice.


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## ajapale

Please keep this thread to discuss the mechanics of the levy. For qualitative discussion see: here.

Some posts moved.


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## monagt

"Suppose there is €150,000 in your DC fund (which would pay a pension in retirement of between €7,000 and €8,000). The levy will amount to €900 a year."  Independent 12th May
http://www.independent.ie/business/...on-pensions-will-hit-your-pocket-2644508.html

So a person with €150k and over 60 should take 25% tax free asap and save 900/4 = 225 per year levy???
225 x 3 = 675 ( this year is gone as it is back taxed)

Am I correct??


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## Duke of Marmalade

monagt said:


> "Suppose there is €150,000 in your DC fund (which would pay a pension in retirement of between €7,000 and €8,000). The levy will amount to €900 a year." Independent 12th May
> http://www.independent.ie/business/...on-pensions-will-hit-your-pocket-2644508.html
> 
> So a person with €150k and over 60 should take 25% tax free asap and save 900/4 = 225 per year levy???
> 225 x 3 = 675 ( this year is gone as it is back taxed)
> 
> Am I correct??


Think so.


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## NorfBank

In case anyone was looking for confirmation. ARF's are not covered by levy

[broken link removed]


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## tester12

*Levy and AMRF*

Does anyone know what the situation is regarding the new Levy and if this will apply to AMRF's as well as ARF's


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## boaber

tester12 said:


> Does anyone know what the situation is regarding the new Levy and if this will apply to AMRF's as well as ARF's



It doesn't apply to either


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## elcato

Are PRBs affected by this ? Given that you cannot increase or decrease the value of it seems a bit unfair on large ones.


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## StevieC

It does apply to PRB's as they are a pre-retirement fund.


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## Mizen Head

*Pensioner of a DB scheme, being paid monthly from Fund (Not an Annuity)*

Will this .06% levy really cost me (and possibly you) 20% of our current pension? 

I have read the thread, listened to the radio, and read the papers. However, so far, I have heard very little discussion on the real impact on people who are currently receiving a pension direct from the DB fund.

Our Fund is well funded but the Trustees decided for the past few years to pay Pensions direct from the Fund in the hope that Annuity rates would improve and they would then buy an Annuity in the future.

My worrying reading of the situation is thus:

Pension 30,000 pa.  (3% annual increase and attached Widows pension) 
The cost of buying an Annuity to fund this pension (at present 3% rate) is 1,000.000.
The Levy on this  is 6,000 pa.
30,000 less 6,000 = 24,000 pa..... a drop in income of 20%.

I believe it is easy enough for Trustees to calculate the value of each individual pensioners pot, and apply the levy in the manner above.

Most Trustees will feel that the remaining members (not yet retired) should not pay for us retired members. 

Please tell me I,ve got this wrong, and cherr me up!


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## boaber

Would it not be (for first year anyway):

(€1,000,000 - €6,000) x 3% = €29,820?


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## Mizen Head

Hi, boaber. I had not actually looked at the that way (I guess I panicked at the thought of 6,000 pa) What you say makes an awful lot more sense, and its not too bad at 180 pa.

You have cheered me up! Thanks


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## Conan

boaber,
I'm not so sure. The levy applies to the "market value of assets under management". This is different from the annual income. So if you have a DC scheme valued at €1,000,000, then the Levy is €6,000 each year. If you are a member of a DB scheme and in receipt of an annuity paid from the Fund (as opposed to where the annuity is secured with a Life Company), then it seems that the Fund is still liable for the 0.6% on the total value, including the capital that might be notionally allocated towards paying pensioners. So if the notional value of your pension was €1m, it seems that the Fund will not be able to distinguish between funds for pensioners and funds for those not yet retired. In that case, will the Trustees distribute the cost of the Levy over all members (pre-retired and retired)? If so, how?
It seems that the Dept of Finance have not taken into account DB schemes paying annuities out of the Fund and DB schemes who have offloaded the annuity risk to a Life Co. So potentially, pensioners in DB schemes who pay the annuity from the Fund could be penalised, whereas pensioners with stand-alone annuities would not be hit.
And pensioners in receipt of a pension under unfunded DB schemes (e.g. Civil Service) avoid the Levy entirely.


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## boaber

Agreed Conan.  The Government have very kindly left it up to the Trustees/Insurers on how to deduct the levy, so I guess it will vary from scheme to scheme.


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