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High-rate relief cuts pose peril for pensions

Advisers warn that the Chancellor’s move to axe higher-rate tax relief on pension contributions for high-earners will be highly damaging to pension savings.

From April 2011, the 40 per cent rate of relief will be tapered down to the basic rate of 20 per cent for incomes of £150,000 and £180,000.

The move will affect 225,000 people who, according to Darling, receive a quarter of the total £6.1bn pension tax relief each year. The Treasury claims it will bring in around £3.1bn.

During his Budget speech on Wednesday, Darling said: “I intend to address an anomaly which sees a tiny proportion at the top take a large slice of the help we give people to save. I believe it is fair that those who have gained the most should contribute more.”

Darling has introduced immediate measures to prevent investors maximising contributions under current rules.

The Association of British Insurers says the proposal sends a “worrying message” to pension savers.

Director of life and savings Maggie Craig says: “The Government must give a categorical assurance that the historic principle of pension savers receiving tax relief on contributions will not be undermined any further.”

Kohn Cougar managing director Roddy Kohn says: “This hits high-net-worth individuals who will not be easily persu- aded that it is in their best interests to continue making pension contributions because, even with tax relief at 40 per cent, many of them harped on about their lack of access to capital so at 20 per cent the incentive is not there to continue. I also think it will harm pensions in general because the message that most people will take home is that pensions are not as good as other tax breaks.”

Informed Choice joint managing director Martin Bamford says: “This is going to be really complicated to implement and police. It is better than a complete abolition of the 40 per cent rate, which is what everybody feared but it is not good news and will discourage higher-earners from making provision for their retirement as well as introducing a level of uncertainty among everyone else. They should not have tampered with pensions.”

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