Pension Tax Relief Cut To Damage UK Savings Industry

by Jason Gorringe, Tax-News.com, London

20 May 2009

The government’s decision to restrict tax relief on pension contributions for people earning over GBP150,000 a year could have a damaging impact on pensions savings in the UK, industry bodies told a parliamentary committee on May 20.

In giving evidence to the House of Lords Economic Affairs Finance Bill Sub-Committee on the recent budget, Maggie Craig of the Association of British Insurers told peers that the long-term consequences of the measures far outweigh the short-term revenue needs of the government, and urged the government to rethink its proposals.

“While the measure itself will affect only a small number of very high earners, we are concerned that the principle that people who save for their retirement will get tax relief has been breached,” she states in prepared remarks. “Tax relief exists as compensation for responsible people who agree to defer some of their income now, so that they are less reliant on the public purse in retirement.”

Furthermore, the proposed changes will add an extra layer of complexity to pensions, in direct contradiction of the ‘A-Day’ measures introduced in 2006 to simplify the pensions tax regime, Craig says.

“The government and the main opposition parties must not undermine the principle of tax relief on pension savings any further by continuing to remove tax relief, either now or in the future,” she adds. “To do so would seriously damage public trust and confidence in the UK’s pension system. That would mean less saving overall, and the prospect of a massively increased public bill for looking after people in retirement.”

The proposed changes, announced by Chancellor Alistair Darling in last month’s budget, could see a restriction to basic rate tax relief on pension contributions for those who receive a total annual income of GBP150,000 or more. The proposals are scheduled to be introduced in April 2011, but new rules which are designed to prevent effective tax planning in the meantime could see the start date if brought forward to April 22, 2009 for many taxpayers. The changes will mean that someone earning GBP200,000 per year and contributing 6% of their income into a company pension scheme will lose out to the tune of GBP2,400 annually.

The government expects the withdrawal of higher rate tax relief on pensions to raise about GBP3bn (USD4.65bn) in additional revenues, but the measure will affect only a relatively small number of taxpayers (less than 300,000), many of whom are expected to find ways to avoid the extra tax.

Nonetheless, Joanne Segars, chief executive of the National Association of Pension Funds, warns that the budget proposals could "destabilise workplace pensions” at a time when they were already under pressure.

"If executives can no longer fully benefit from pension saving, they may disengage from workplace pensions and be less inclined to provide high-value pensions for those on average incomes," she said.

Tax advisors PricewaterhouseCoopers have urged the government to at least put its proposals out to consultation before implementing the changes to pension tax relief to ensure that the ‘level playing field’ objective sought becomes the reality in practice.

“Further consultation on new pension proposals outlined by the government is the only way forward to ensure that in the attempt to achieve a level playing field, consideration of the fundamental ‘pensions deal’ proposition is upheld,” said Alex Henderson, partner, PwC.

“Although the proposed changes announced refer to those with total income in excess of GBP150,000, other employees may be keen to understand changes to pension tax rules. As a long-term investment there will be the worry that the limits could again be amended (immediately without the benefit of any consultation),” he warned.

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