Pensions - Articles - Speculation on Chancellor removing pension tax relief


Growing speculation that the chancellor may be planning to remove higher rate tax relief from pension contributions in his March budget. Aegon warns this could kill off remaining defined benefit schemes in the private sector and raise major issues for public sector defined benefit pensions.

 Steven Cameron, Pensions Director at Aegon, says: “There are rumours that the chancellor may reform pensions tax relief in his 11 March Budget. At the moment individuals get tax relief on contributions at their highest marginal income tax rate which gives a 40% top up for higher rate taxpayers. If this were removed the top up would fall to 20%.

 “In defined contribution schemes, what people get back is based on their contributions so a lower top up would reduce their future pension and may discourage some from saving through pensions.
 The implications for defined benefit pensions are far less clear. Here, the individual is promised a certain pension at retirement. Their contributions are fixed, tax relief top ups are paid to the scheme and the employer pays whatever extra is needed to balance the funding of promised benefits across the membership.

 “If the Government cuts the top ups for higher rate taxpayers, either the members will have to pay more or the employer will have even greater balancing contributions. Neither will be welcomed so this could be yet another prompt to close the few remaining 'gold plated' defined benefit pensions in the private sector.

 “There is also the risk that higher rate tax employees would face a ‘benefit in kind’ tax charge on employer contributions.

 “While there are few remaining in the private sector defined benefit schemes remain common in the public sector. Any changes to tax treatment of pensions would need to apply here too to avoid divisive preferential treatment for public sector employees. So the government will face explaining significant contribution increases for public sector higher rate tax payers or finding additional funds from public sector employers which ultimately may have to be paid for by general taxpayers.

 “This is one of many complexities that need to be fully thought through ahead of any reform of the tax treatment of pensions.”

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