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Is a pension tax relief cut worth it?

paul mcmillan
Paul McMillan, Editor, Retirement Strategy

This month’s Retirement Strategy catches up with The People’s Pension, another new market entrant ahead of auto-enrolment, which is administered by construction industry pension specialists B&CE. The firm wants to compete with Nest and others at the low to middle end of the market and will charge a single AMC of 0.5 per cent that it forecasts will fall with scale.

Director Patrick Heath-Lay hopes B&CE’s experience with construction workers, whose average employment term is eight months, will put it in good stead to cope with the potential headaches of dealing with transient workers.

The run-up to March’s Budget comes with the usual predictions that the Government will look to further restrict higher-rate pension tax relief. However, the mood music appears significantly louder than usual, with the LibDems openly calling for cuts to help fund an increase in the income tax threshold to £10,000.

This may well be part of a Government market research/kite-flying exercise to judge public opinion but there is a strong feeling among industry and political watchers that a change could be on the cards.

IFA Adrian Pickersgill and the Trades Union Congress go head to head in this issue on the social effects of cutting pension tax relief. Pickersgill warns of the damage a cut could do to a nation which is already under-saving while the TUC warns the current system offers too much Government subsidy to the well-off.

You would hope it is highly unlikely the Government would look to revisit the messy and complex severing of higher-rate relief proposed by the previous Labour administration.

Cutting back on the tax-free cash benefit is unlikely to produce any short-term gain for the Government. It would not get away with applying such a benefit cut retrospectively and so could only reduce it for future contributions.

This leaves further cuts to the annual and/or lifetime allowance. Lowering the annual allowance to £40,000 would save £600m while cutting to £30,000 would save £1.6bn-£2bn.

Is this a cost worth paying to spread further instability through the pension system at a time when we are trying to get huge swathes of the population to put their faith in pensions for the first time?

It will go nowhere near raising the £9bn required to increase the income threshold to £10,000 unless the Government decides to once more lower the higher-rate tax threshold as a balance and incur the wrath of the politically prized “squeezed middle”.


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. One wonders if the Government are not missing a trick with Tax Relief. A recent Paper by the Institute for Fiscal Studies suggested that low tax regimes are correlated with income imbalances in the population, or to put it another way, low taxation makes it realistic to provide very high remuneration, because people are able to retain of high percentage.
    The Government wants to increase their tax income; society believes that the levels of remuneration at the top end have reached obscene levels. There is therefore a strong argument to raise tax rates. Current rates are historically low.
    However, there is also a need to attract investment into entrepreneurial companies and to encourage people to save more. Therefore maintain, or even extend the current tax relief vehicles. The higher tax rate actually makes such vehicles more attractive.
    Certainly the “cost of relief” to the Treasury increases, but the net tax income is higher.
    There is also the question of whether this “cost” is a real one. Remove the reliefs and there will be a short term increase in net tax income, but I would suggest that the longer term effect may be negative. Society has an amazing ability to adjust to changing tax regimes, and not all changes are automatically beneficial. The upsurge in ISA contributions may be an indicator. The current effect is only slightly negative, in that an increasing level of investment income is not being taxed at higher rates (quite a lot will bear tax at the Basic Rate through WithHolding Tax). But what happens in 20 years when people start to withdraw their income TAX FREE. This could be a significant loss to the Treasury’s income stream. And then we will hear lots of boring stories about how much it “costs” the Treasury.
    Just to put that comment into perspective – the money is not the Treasury’s, it is yours. The Treasury is not a separate country existing in the middle of GB. So what we are talking about is cash flow and the use of incentives to attain outcomes that are deemed to be beneficial. It may be more ethical is Politicians and Civil Servants were truthful in their statements, instead of just looking for short term headlines. I know – wishful thinking. But it may not be it people refused to accept the garbage that emanates from Central London in the guise of policy.

  2. Julian Stevens 6th March 2012 at 6:59 pm

    It’s just more nails in the coffin of private pension provision. Next the government will start taxing the interest on fixed income holdings within pension funds. And, whilst we’re at it, I can almost hear Danny Alexander saying, why don’t we slap an extra 10% tax on dividend receipts? And maybe some CGT as well.

    All of which is exactly the opposite of what the Conservatives promised in their pre-election manifesto pledge. Politicians? A pox on all of them.

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