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How tax relief changes will hit pension contributions

The highest earners in the country would lose out more on pensions tax relief under the Conservatives than the Liberal Democrats.

Each of the major parties has indicated cutting the tax relief on higher earners following the general election.

Scenarios modelled by Fidelity Worldwide Investment show someone earning £250,000 a year and making gross pension contributions of £40,000 a year would effectively pay an extra £15,000 under Labour, £13,500 under the Conservatives and £7,000 under the Lib Dems.

Labour wants to cut relief to the basic rate for earnings over £150,000. The Conservatives favour gradually scaling back the annual allowance to £10,000 for people earning over £150,000 while pensions minister and Lib Dem Steve Webb backs a flat rate set at 33 per cent.

Labour and the Tories will reduce the lifetime allowance to £1m, while Webb has said there would be no need for a limit once tax relief is equalised.

Under Webb’s proposals someone earning £25,000 would benefit from an extra £400 in tax relief, while people further up the salary scale would be caught far lower than under Labour or Conservative plans (see table below).

Fidelity Worldwide Investment retirement director Alan Higham says: “It seems a shame that just as pensions were made more attractive by the new pension freedoms, they are to be made more complex and less tax efficient.

“However, a window exists to make your pension contributions under the current rules before the new Government makes any changes; whatever they may be.”

Fidelity_table

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