Following Ed Balls’ comments today on the merits of reducing pensions tax relief, Chris Noon, Partner and tax expert at pension consultants Hymans Robertson comments:
“Limiting tax-relief on pension contributions to just the basic-rate delivers the highest immediate funding boost to the Government (likely around £7bn per annum). However, this is broadly what the Labour Government proposed back in 2009, an option that was thrown out by a Coalition review as being unworkable. The output of that consultation process said in October 2010:
“......the Government had reservations about the previous plans. It felt that this approach could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness. These concerns were shared by representatives of the pensions industry and employers.”
“We agree with the Coalition’s previous assessment and believe that any move to scrap or reduce higher rate relief would be the end of effective private sector pension provision in the UK. There has to be an end to the practice of raiding pension savings for revenue raising. All this is doing is storing up problems for the medium to long term as people switch off from saving – this will increase reliance on the state.
“The consequences of only providing basic rate relief on pension contributions need to be thought through properly. In effect, the Government would be forcing people to limit pension saving to a point that ensured they weren’t higher-rate tax-payers once in retirement (i.e. a maximum pension of c. £42,500 per year). If people breached this limit, there is a possibility that they would pay an effective rate of tax of 60% to 80% on this incremental pension saving.”
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