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MM leader: Perils in tampering with pension tax relief

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According to reports, the Government is again looking at axing higher-rate pension tax relief in an attempt to save significant expenditure.

The estimated £7bn of savings must be tempting to an administration desperately seeking ways to cut costs but it should be very wary of messing around with the biggest incentive people have to save into a pension.

Fears about an end to higher-rate tax relief were regularly expressed in recent years in the run-up to Budgets and pre-Budget reports. However, indications from Westminster are that scrapping higher-rate relief is back on the agenda and is being looked at closely in Conservative circles.
The LibDems called for higher-rate relief to be scrapped before the general election and it is hard to see Labour putting up much of a fight if the coalition proposed the move.

Advocates of scrapping higher-rate relief would suggest that much of the money is given to people who would have saved into a pension anyway and the Government funding could be better targeted.

Although the tax is deferred rather than being permanent relief, large numbers of higher-rate taxpayers will be paying income tax at the basic rate when they are drawing their pension.

But while, on paper, there may be more efficient ways of using Government funding, there are significant dangers in removing a simple and easily understood incentive for people to save for their retirement.

The forthcoming auto-enrolment reforms are an attempt to engage large numbers of people for the first time with the need to save for their future. It would be a retrograde step if many others who currently save into a pension are simultaneously disengaged due to the Government messing around with pension tax relief.

Missed opportunity

The Financial Services Bill last week unveiled the Financial Conduct Authority’s strategic and operational objectives.

This was a missed opportunity for the Government to introduce an objective of increasing levels of saving and protection in the UK, a move we believe would create a more balanced and effective regulator.

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Readers' comments (3)

  • These 'discussions' are one of the main reasons why people are turned off by pensions and NEST will fail (just like stakeholder) - constant tinkering by the Government of a system that whilst not perfect certainly wasn't broken.

    How can you plan for the future when the 'rules' change every few years when the next minister who wants to make a name for himself starts coming with new ideas to 'improve' pension saving.

    The only equitable solution I can think of is to have a flat rate of tax relief fixed somewhere between higher and lower rate tax relief. That way basic rate tax payers are incentivised to save and higher rate tax payers still have a good reason to save as their pension income is likely to be taxed at basic rate.

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  • Whatever happened to 'we're all in this together'? Public sector schemes are being attacked with increased contributions, later retirement ages and changes to scheme terms which will result in far lower payouts in retirement. The result is generally supportive comments here with snide talk about 'gold plated schemes'

    Yet when the idea of scrapping a relief only enjoyed by those earning more than £40,000 (twice the national average) is mooted, we get mass hysteria and an MM leader on the subject.

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  • "a more balanced and effective regulator"? Some hope. All we seem to have had forced upon us (with the costs of paying for it all) is a regulator that's even less balanced, less effective, less open, less transparent and less accountable than it ever was.

    Back in the 90's, the PIA was described by a respected think-tank as "an unbridled monster trampling roughshod over anyone or any body that dares to try to stand in its way". And what do we have now in the FSA? An even bigger and more vicious monster, armour-plated and heavily armed, with a seemingly insatiable appetite for power and (as always, other peoples') money. Will this Orwellian nightmare ever end?

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