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Labour under fire over pensions tax raid plans

Experts have condemned Labour leader Ed Miliband’s proposal to cut the limits of annual and lifetime tax-free savings in pensions.

Miliband plans to slash the annual allowance form £40,000 to £30,000, and the lifetime allowance from £1.25m to £1m, to fund a £3,000 reduction in university tuition fees.

The proposal has come in for heavy criticism from the pensions industry.

Fidelity Worldwide retirement director Alan Higham says the reductions in the lifetime allowance for tax-free savings will leave pensioners on defined contribution schemes deals worse off than their defined benefit counterparts.

He says: “£1m sounds a lot but at current annuity rates if you were to buy a typical inflation linked pension it would only be £26k a year.

“But if you are lucky enough to be promised a DB pension then you can get £50,000 out of the regime.

“It goes too far and there’s a massive unfairness between DB and DC pension-holders like public sector employees.”

Informed Choice executive director Nick Bamford says by further tweaking the tax-free ceilings, Labour risks further undermining confidence among savers.

He says: “Nobody in the last 20 years has had a simple platform on which to save for the future with any degree of confidence.

“It’s almost as if they are not thinking straight. All the consumer really wants is an investment in which they can safely save feeling sure that they aren’t constantly getting clobbered.”

The National Association of Pension Funds chief executive Joanne Segars agrees: “These incremental shifts in pension tax policy are not the right way to manage the future retirement savings of millions in the UK. Such a move by any government threatens to undermine the confidence of pension savers, employers and schemes alike. These changes are likely to affect many middle-income savers, such as senior nurses and senior teachers.

“This is not an issue on which any future government can afford to make knee-jerk policy decisions upon. We need a proper debate on tax in the broader context of pensions and retirement savings, and this should be overseen by an Independent Retirement Savings Commission to ensure the long-term needs of savers remain at the very heart of the Government’s approach.”

ABI director general Huw Evans adds: “The pensions and long-term savings industry supports reform of tax relief but this is not the way to do it.

“We need a focus on reforming the pension tax relief system as a whole to make it fairer, better value and encourage saving from middle earners, rather than just piecemeal cutting back the existing system to pay for other policy objectives”.

However, The Financial Inclusion Centre founder Mick McAteer says taxpayers are already paying too much to subside pension saving.

He says: “If you have an industry that is very inefficient then this allows them to continue using taxpayers’ money to encourage people to save, and perpetuates indiscipline.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Does Mick McAteer realise that when he says that “taxpayers are paying too much”, tax relief is the individual tax payer getting their own money back and nobody else is paying for it?

    One question I would ask him is how would he encourage saving for retirment? How would he ensure that joe public will have enough when they stop working? I agree with him that the pension industry could improve. I just think that a more practical solution is required.

    One thing to note: if you remove 45% tax relief, then those individuals will just reduce their income and pay their pensions through company contributions.

  2. The best solution is to wind up the DB system currently enjoyed by MPs and top civil servants. If these people had to buy their own pensions in the market place then suddenly all would be clear to them and they would then be in a position to represent all of us in a proper manner.

  3. As someone who believes in progressive taxation I have never understood the idea that we tax with the one hand and then give back with the other. Those who earn sufficient to pay higher rates of tax don’t need an incentive to save and those who are only basic rate the incentive is insufficient. Solution – make a minimum level of “retirement” contribution compulsory ( sufficient to deny those in retirement and additional state benefits), abolish tax relief completely and use the tax savings to reduce the basic rate for all. No one has the right to be poor – and then expect the tax payer to feed them. Make contributions compulsory – no need for any incentives.

  4. @ Bones
    The problem with your solution is that people in DB schemes get stealth tax relief. This is particularly the case with underfunded or completely unfunded DB schemes. The full cost of pensions paid by such schemes is not easily attributable to individual pensioners. Much of the cost is thus not taxed as a benefit in kind on scheme members at higher rates of tax.

  5. Why bother to save for a pension because if you do governments will constantly raid your pension funds and when you retire you’ll have to fund your lifestyle with your pension money and pay for your own care.

    if you either spend all your money or save it in ISAs once retired you can go on world cruises , great holidays, gamble or buy antiques and the Government will then fund your long term care.

    If people are to be encouraged to save for 40 plus years then ‘ numpties’ have to stop changing ‘the goal posts’ every 2 years.

  6. Is it really right to use the words “middle-income savers” when referring to people who would be impacted by these proposals? Let’s be realistic, someone who can afford to save over £30,000 a year (or accrue through their DB scheme however generous) into their pension is not a middle earner.

  7. This doen’t stop people saving for their pension – it just says if you accrue a fund of over £1m, we aren’t going to incentivise you beyond that.

    An annuity of ‘only’ £26K a year is almost exactly the national average earnings. That’s not a bad figure to retire on….

  8. @Smithy0364
    Which brings me back to my earlier point: why do we incentivise people like Ed Miliband to have such large pensions, paid for by the taxpayer through ‘stealth’ subsidies that do not attract tax?

  9. Philip Gosling 3rd March 2015 at 5:49 pm

    Of course the money doesn’t actually exist. People often put extra money into pensions because they get tax relief on the way in and pay tax on the way out. Reduce the tax relief now and they will almost certainly put less money into pensions. They might put it into other ares like ISAs, EIF, etc so there might not be much tax saving for re Ed – when have any forecasts being accurate?

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