News In Focus
11 March 2010
Pension tax relief changes branded "ridiculous"
Looming changes to pensions tax relief will undermine workplace pensions, according to the National Association of Pension Funds’ Investment Council.
The council said the Government’s proposals to withdraw tax relief on employer and employee pension contributions for higher earners were "ridiculous" and "dangerous".
Under reforms planned for introduction in April next year, higher-rate taxpayers will no longer be able to claim tax relief on pension contributions at 40%. Instead, the pension relief available to those earning more than £130,000 a year will gradually taper down to 20% for those earning £180,000 or more.
The Government has said the changes would affect only the top 1% of earners, but council chairman Ray Martin rejected the claim. "In reality this is a ridiculous change to our tax system," he told the NAPF's annual conference in Edinburgh. "The Government is destroying the UK's pension tax system to raise very little additional tax revenue, but causing untold damage to workplace pensions in the process as well as placing more complexity and administration on pension funds."
The Government has estimated that restricting pensions tax relief for high earners would generate savings of £3.6 billion for the Treasury. However the NAPF said the Government was overstating the savings, which it estimated were more likely to be around £900 million to £1.5bn.
Mr Martin proposed reducing the annual allowance – the maximum amount by which the value of an individual's pension fund can grow each year before further increases are taxed – from the current £245,000 to between £45,000 and £60,000. He said this would avoid "most of the costs and complexities arising under the new regime".
"Most importantly it would avoid the risk of many individuals earning less than £130,000 being discouraged from pension saving. And it would also reduce the likelihood of key decision makers within company boards disengaging from pensions, leading to harmful secondary effects for all employees."