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&#39Rethink tax on pension credits&#39

Scottish Equitable is calling for the Government to offer a higher incentive to low-income savers by linking the pension credit to the basic tax rate.

In its response to the consultation on the proposed pension savings top-up, ScotEq claims the credits equate to a 40 per cent tax rate on the private pension income of low earners. This would mean the equivalent of higher-rate tax being applied to people who are likely to have paid only basic tax at 22 per cent during their working lives.

ScotEq believes the proposals are enough incentive for low earners to save for their retirement although it says the Government&#39s plans are a significant improvement on the present position.

The plan for pension credits was announced last year and is aimed at encouraging saving among low-earners after the minimum income guarantee has been taken into account.

The life office also says many in the stakeholder target group will be affected by the pension credit. It argues that if the plans are not changed it will be very difficult to encourage people to save in the period between the launch of stakeholder in April and the launch of the credits in 2003.

ScotEq pensions development manager Margaret Craig says: “We do not think the current proposals are an incentive to save. If people have been paying basic-rate tax all their lives, they may ask why they have to effectively pay higher rate tax in retirement. Also pension credits will have to be simple enough to be included in decision trees.”

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