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How much can the Govt save from pension tax relief options?

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.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Dear Hector & George
    Congratulations!!! Between you, you are going to bring the country, its people (thats consumers to you hector) and its future to a total stand still. For the very few who remain unaffected George, Hector is going to ensure there will be no very little chance of them getting access to advice. Many congratulations to you both – you are doing a sterling Job

  2. David Trenner - Intelligent Pensions 23rd February 2012 at 4:44 pm

    My understanding is that the various options have been put out there by the government to gauge their popularity, and if that is the case they will be loving this sort of discussion!

    The assumption of all the commentators seems to be that something will happen to pensions.

    But I would suggest that we need to shout very loudly: LEAVE PENSIONS ALONE!!

    With so many changes to pensions the public are being driven away from the option altogether; and who can blame them?

    “How much can I pay?” is a very simple question. Sadly there has not been a simple answer since Simplification came along to muddy the waters!

    LEAVE PENSIONS ALONE!! Otherwise within a few years all we will have is Nest as savers vote with their feet and providers drop an area made unprofitable by constant government meddling!!

  3. How about abolishing tax relief completely and making a minimum level of pension contribution compulsory – just enough to ensure that each person will be ineligible for any means tested retirement benefit. The present tax relief system is largely illusory for basic rate tax payers anyway,whilst providing unnecessary incentives for those on higher rates.

  4. Pensions contributions and income from their investments has historically been treated as deferred pay: no taxation until benefits are drawn.

    I don’t have a problem with higher rate payers receiving higher rate tax relief. They are contributing to the economy by investing in the major companies of the Stock Exchange.

    It’s in all our interests for the SE to be bouyant, as it lessens and may even remove the pensions black holes which will impoverish every one of us if we live long enough to need a pension.

  5. Alistair Cunningham 23rd February 2012 at 8:22 pm

    LEAVE PENSIONS ALONE!!! (3 exclamation marks for increased emphasis)

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