Standard Life says the Government will be unable to pay for an increase in the income tax earnings threshold to £10,000 through a single cut to pension tax relief for high-earners.
Recent reports suggest the Treasury is considering cuts to pension tax relief for higher-rate taxpayers in an attempt to fund an increase in the income tax earnings threshold from £8,105 to £10,000.
In an interview with The Daily Telegraph earlier this month, Treasury chief secretary Danny Alexander reiterated the LibDems’ pre-election commitment to scrap or restrict higher-rate pension tax relief.
A report in the Financial Times last week suggested the Government is considering reducing the £50,000 annual allowance in the Budget on March 21.
Pensions experts say if policymakers are intent on reducing pension tax incentives for high-earners, they have three options to choose from – cutting tax relief on all contributions to 20 per cent, reducing the annual allowance for tax-privileged pension saving or capping the amount of tax-free cash that people can take at retirement.
Standard Life head of pensions policy John Lawson (pictured) says none of these options would raise enough money to pay for increasing the personal allow-ance to £10,000.
According to Standard Life’s analysis, scrapping higher-rate relief for people earning more than £100,000 would save £3.6bn, while removing higher-rate relief for all would save between £5bn and £7bn.
Cutting the annual allowance from £50,000 to £40,000 would save the Treasury £600m and reducing it by a further £10,000 to £30,000 would save between £1.6bn and £2bn.
Lawson says: “The cost of raising the personal allowance by £100 is £490m in 2012/13, so the cost to the Treasury of increasing the personal allowance from £8,105 to £10,000 is £9.3bn. None of the possible options for cutting back pension tax relief for high-earners raises £9.3bn on their own.
“There are no easy options here. By reducing tax relief, you are sacrificing the future to try to stimulate the economy in the short term. Any Government cutting tax relief now should make a firm pledge to restore it at a future date, given the degree of under-saving.”
Legal & General pensions strategy director Adrian Boulding says the Government is unlikely to target tax-free cash because it will not deliver short-term savings.
At the moment, anyone who retires over 55 can take up to 25 per cent of their pension pot tax-free.
Boulding says: “It is very unlikely the Treasury will cap tax-free cash because it would take a long time for it to receive any benefit.
“Governments do not tend to make changes to pensions retrospectively, so if it did restrict tax-free cash it would be for future contributions only.”
Scottish Widows head of pensions market development Ian Naismith says any fundamental changes to the tax relief system, such as scrapping higher-rate relief, would be complicated.
He says: “I am not sure there is a simple way for the Government to do this. I do not think you can have a cut-off point of £100,000, so it would have to revisit Labour’s previous proposals and introduce some sort of tapering.
“It would be a backward step because Labour’s proposals were a nightmare to understand.”
Lawson says the attraction of cutting back the annual allow-ance is that it would be less complex than a complete overhaul of the system but Standard Life’s figures suggest this would provide the Treasury with relatively modest savings.
Lawson says: “Reducing the annual allowance preserves the integrity of the pension system because you still get relief on the way in and tax on the way out.
“Reducing the annual allow-ance to £30,000 would raise about £1.8bn which is enough to raise the personal allowance by around £370.”
Bestinvest financial planning director James Sumpter says high-earners should contribute as much as they can into a pension before the Budget, given the uncertainty over tax relief.
He says: “If pension savers are considering contributing to their pension in this tax year and pay tax at a rate of 40 or 50 per cent, they should consider doing so now – and, import- antly, within the next five weeks before the Budget.”