Jeff Salway: Industry has lost moral high ground on pension tax-relief reform

THE pensions industry has clearly been taking lessons from the Chancellor on the importance of presenting dubious arguments in the most politically acceptable terms.

Unfortunately for the industry, the Chancellor has shown no inclination to listen to its increasingly shrill protests over changes to high earners' tax relief. The industry would normally welcome a Budget free of pensions tinkering, but on this occasion there had been some hope Alistair Darling had taken heed of lobbying from insurers and pension funds and stepped back from the proposals.

Under the plans, announced last year, higher rate taxpayers will no longer be able to claim tax relief on pension contributions at 40 per cent, as of next April. Instead the relief available on pension contributions for those earning more than 130,000 a year will gradually taper to just 20 per cent for those earning 180,000 or more. This breaks a long-standing link between income tax and pension tax relief, whereby savers get tax relief at their highest marginal rate.

The Treasury claims restricting the relief will raise around 3.6billion a year and, when you factor in the TUC's estimate that the richest 1 per cent claims more than a quarter of the annual tax breaks on offer, you can follow the Treasury's chain of thought.

What it did not allow for was the broader message, with yet another move that undermines the appeal of pension saving at a time when the onus is increasingly on individuals to take responsibility for their retirement planning.

The industry, which believes the Treasury has overestimated the potential savings, also has very valid complaints regarding the cost and complexity of the changes.

The Treasury this week raised its estimate for the annual cost to companies of the change to 115million a year, up from 90m. It also estimated that the change would affect just 800,000 people – the top 1.5 per cent or so of pension savers – so the industry has reverted to attacking the restrictions as a measure that will eventually affect lower income earners too, in the form of a trickle-down effect. Is that a fair point, or just cynical?

This is where the industry is on shaky ground. The claim that the plans will have an adverse impact of lower income groups has little foundation and, to an extent, is little more than scaremongering by an industry that stands to lose significantly from the proposals. From an administrative and technical perspective, these changes are a headache for the industry, but it's fatuous to conjure up some trickle down theory, implying that they will have any impact on the vast majority of pension investors.

As it stands, a large proportion of company owners, directors and senior executives already have their own private pension provision, such as self-invested personal pensions (Sipps), with workplace schemes on the periphery of their retirement funding plans. Few of the pensions advisers I have spoken to regarding this – and these are the people working closely with companies in guiding their pensions decision-making – believe senior executives will be sufficiently disillusioned by the move to water down pensions provision for their employees. Some will, but not a significant amount and certainly not large, forward-looking employers who view pensions as a key part of their benefits package.

That's not to say changing tax relief rules is a positive move. Whether or not you disagree with the restrictions, they constitute further tinkering with pensions by a government that has done so much to undermine pension saving. But the industry is doing itself a disservice by flogging the argument that we're all going to lose out because of a measure that targets a minority of high earners.