Share
The Government must stop moving the goalposts on pension rules as a short-term fix for economic woes
Pensions need long-term trust
As the pension industry prepares for the next Budget, it is still reeling from the effects of the last one in April and the pre-Budget report in December.
In April, the Government made the dramatic decision to restrict tax relief on pension contributions. This went to the heart of the “UK pension deal” - that if we tie up our savings until later life and convert them into an income, we get the tax benefits up front.
The Government’s defence was that it only wanted to target a small minority - 25 per cent of tax relief goes to only 2 per cent of pension savers. The problem is that, in practice, it is very difficult to contain the effect of changing tax rules.
Anyone with income of broadly £130,000 or above is affected. The difficulty is working out if you fall into that bracket or not.
Individuals will have to make a judgement call whether to contribute during a tax year if they think their total income will be around the cut-off
level. Some may make the decision to err on the side of caution in order to avoid an unwanted high tax bill, even if, in hindsight, they might have been unaffected.
Higher-earners in group schemes are also hit. Employers will have to decide how to reward these employees. For some, it will still be very much worthwhile paying into a pension scheme, especially if they expect to be a basicrate taxpayer in retirement. For others, employers may
give cash in lieu of pension contributions. Whatever route, employers will need to review pension provision.
Although restricting tax relief for the very highestearners could be seen by some as producing a fairer outcome, it would be incredibly naive not to realise this will affect people’s incentive to save. They want the best return and, unfortunately, if decision-makers are not benefiting as much
personally from pensions, their commitment to them in respect of the company scheme will also be affected.
The proposed implementation of the new tax rules from 2011 onwards does not help either. The new rules are complicated and will mean schemes making expensive changes to administration, systems and literature.
Although this is a tax on the individual, the Government is proposing that schemes should be able to reduce benefits to pay the tax. The threat of this additional unwanted admin might be enough for employers to swap pension contributions for their top employees to a cash benefit.
The restrictions to tax relief were supposed to be aimed only at a few but the message will be heard by many more than that.
To be able to plan and save long-term, people need to have assurance over the stability of longterm saving. To create an atmosphere where changes to parameters can, and are, made will only create instability in the belief in long-term saving and the rules will be met with distrust.
As the Treasury prepares its Budget papers, it should remember that if we are to rise to the challenge of helping more people in the UK to save more money towards their retirement income we need to make sure pensions are not seen as the short-term answer to the longer-term fiscal
problems the UK faces.
Rachel Vahey is head of pensions development at Aegon
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
