How do contributions to personal pension schemes affect income tax position?

How do a company's pension/retirement contributions affect deferred income tax assets and liablities? Can someone explain why deferred tax assets generally seem to increase when large pension contributions are made?

• Answer:

  Generally, increasing a plan's assets by additional contributions to the plan don't by themselves create deferred tax assets. What creates deferred tax assets are increases in the projected benefits obligation (PBO) from the plan. And to the extent that those contributions generate increases in the projected benefits to be paid to employees from the plan, beyond the amount of the contributions, then those contributions contribute to increases in the value of the deferred tax assets. In a defined contribution plan, such as a 401(k) plan, generally you wouldn't see this - the only deferred tax assets would be related to nonpension retirement benefits, such as extended healthcare, that the company typically doesn't fund in advance. You'd be more likely to see this in a defined benefit plan, like the pension plan I had when I worked for a major pharmaceutical company, and many of those plans are being shut down if they haven't already been closed out.