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Brown Facing Opposition To Cap On Pension Tax Relief

by Robert Lee,, London

09 December 2003

Chancellor of the Exchequer Gordon Brown is expected to announce in his pre-Budget speech on Wednesday the introduction of a £1.4 million cap on executive pension funds' eligibility for tax relief.

Whilst the proposal has been widely criticised by the business community, the Inland Revenue predicts the impact of the changes will be relatively minor, negatively affecting only 1,000 people per year, with a further 5,000 touched by the new cap when it is introduced in April 2005.

The Treasury meanwhile is justifying the move by saying it will “sweep away the complexity of the system”, the only beneficiaries of which at the moment are “accountants and advisors”, it claims. Officials also claim that almost 60% of directors working for firms in the FTSE 100 already have some kind of pension cap in place on the amount they can claim in tax relief on their contributions.

Additionally, the new system is to increase the maximum tax-free lump sum from £150,000 to £350,000 and permits employees to draw from work-related pension schemes as opposed to just personal plans.

However, there remains opposition to the government’s measures and according to a survey undertaken by consulting firm Hewitt, Bacon and Woodrow, more than half of the firms questioned may choose to pay executives in the form of a cash sum rather than a pension when the cap comes into force, the Sunday Time reports. Consequently, this could result in the equivalent amount of salary (up to 40%) being put into the pension fund and paid directly to the executive.

The firm also warns that the cap could affect those on incomes down to £100,000 per year. Kevin Wesbroom, a pensions expert with Hewitt, told the Times: “If you stick at £1.4m, and you increase it in line with inflation, then you start to bite into middle England and you soon get up to the level of half a million or more people being affected.”

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