Pensions tax relief changes welcome, but risk ensnaring non higher earners | Pensions and Lifetime Savings Association

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Pensions tax relief changes welcome, but risk ensnaring non higher earners

01 September 2010

Government plans to restrict pensions tax relief for high earners are sound in principle but need some urgent fine-tuning, pensions experts said today.

The National Association of Pension Funds (NAPF) warned that the current proposals risk unfairly penalising those who are promoted or made redundant, or who have to retire early because of illness.

The inclusion of ‘past service’ into the planned tax workings will also hit those with final salary pensions who have spent a long time with their company. These individuals could find that a new assessment of their defined benefit or ‘final salary’ pension benefits leaves them exposed to tax charges aimed at much higher earners.

The proposals come as the Government seeks to raise revenue and target tax relief away from the UK’s wealthiest individuals. The NAPF campaigned for a reduction in the Annual Allowance down from £255,000 to around £45,000 as being the best option.

This approach restricts the tax break on offer to higher earners but, unlike the system proposed under the Labour government, does not encourage them to quit their workplace pensions – a move which would have undermined pension provision for all.

While the NAPF is pleased that the Government has adopted its overall suggestion, the UK’s leading pensions body is concerned that unintended consequences will punish savers who are not high earners.

Joanne Segars, NAPF Chief Executive, said:

“The Government has got the overall approach right, but this is quite a big shift in policy, and work needs to be done on the detail to remove any unintended consequences.

“It’s unfair that people losing their jobs or retiring early due to ill health will be hit with a bigger tax bill. We also don’t think it’s right that past service should be counted in the way the Government suggests.

“The planned regime has thrown up a series of issues that must now be resolved. If they are not, many people risk getting caught up in a bewildering and expensive set of rules that were aimed at those earning much more.”

In its response to the HMT/HMRC consultation on restricting pensions tax relief, the NAPF calls on Government to:

  • Allow those getting ‘one off’ benefits due to early retirement or redundancy to carry forward some of those benefits into the Annual Allowance for up to 5 years.
  • Carefully reconsider whether to include pre April 2011 accrued service in pension input calculations.
  • Clarify their thinking around ill health retirement, which includes those leaving work due to permanent incapacity.
  • Exclude deferred pension scheme members from the reduced Annual Allowance test. To include them would create an administrative headache for employers.
  • Review its plans to cap pension tax relief on employee pension contributions at 40%. The NAPF believes this would add to complexity, would not yield the amount forecasted.

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