Pensions tax relief plans 'dangerous' warns lobby group chief

Published on Wednesday 10 March 2010 20:32

THE government's imminent reform of pensions tax relief has been branded "ridiculous" and "dangerous" by the industry's biggest lobby group.

Ray Martin, chairman of the National Association of Pension Funds' Investment Council, yesterday accused the government of undermining workplace pensions by deciding to withdraw tax relief on employer and employee pension contributions for higher earners.

Under reforms slated for introduction in April 2011, higher rate taxpayers will no longer be able to claim tax relief on pension contributions at 40 per cent. Instead, the pension relief available to those earning more than 130,000 a year will gradually taper down to just 20 per cent for those earning 180,000 or more.

Martin dismissed the government's claim that the changes would affect only the top 1 per cent of earners as wide of the mark.

"In reality this is a ridiculous change to our tax system," he told the NAPF's annual conference in Edinburgh. "Saving for a pension should be a no-brainer, shouldn't it? It is also a dangerous tax change. 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, which represents 1,200 pension schemes with around 15 million members, said the government was overstating the savings, which it estimates are more likely to be around 900 million to 1.5bn.

And while the government believes it will cost between 50m and 90m a year to administer the changes, NAPF members say it is likely to be at least ten times that figure.

Martin said: "If the government must find extra tax revenue from high earners, they need to find a better way. That's why the NAPF is proposing a more sensible way forward."

He 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 to 60,000. He said this would avoid "most of the costs and complexities arising under the new regime".

Martin added: "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."