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Political parties target pension tax relief reforms

The Conservatives, Labour and the Liberal Democrats are setting their sights on reform of pension tax relief as politicians search for cost savings ahead of the next general election.

Former Shadow pensions minister Rachel Reeves (pictured) indicated at the Labour conference in Liverpool this month that Labour will look to reform higher-rate pension tax relief if it wins the election.

Reeves said: “We spend £20bn a year on tax relief for pensions and two-thirds of that goes to higher-rate taxpayers. Half the population get just 10 per cent of that £20bn.

“I would like the Government to look at ways to make pension tax relief more efficient, more effective and better value for the taxpayer in incentivising the people who most need to save.”

Pension tax relief was also discussed at the Conservative conference in Manchester last week. Centre for Policy Studies research fellow Michael Johnson reiterated his calls for the Government to scrap higherrate relief and use the money saved to pay for an improved basic state pension.

Scrapping higher-rate relief was a LibDem policy before the election which was promoted by current pensions minister Steve Webb.

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Hargreaves Lansdown head of pensions research Tom McPhail (pictured) says: “I think the issue of pension tax relief will build up a head of steam over the next couple of months. Michael Johnson’s arguments about scrapping higher-rate tax relief seemed to get a good hearing in Manchester.”

But politicians have been warned to tread carefully before pursuing further reform of the pension tax system.

Suffolk Life head of marketing Greg Kingston says: “I am not surprised politicians are looking at pension tax relief because they are probably looking at everything that has a big price tag attached.

“It is an easy target because it is expensive but looking at it in isolation rather than as part of the whole savings landscape would not be a helpful exercise.”

Standard Life head of pensions policy John Lawson (pictured) says: “It is dangerous to go for higher-rate tax relief because higher-earners are not necessarily fat cats. We are talking about people who are earning £42,000, who are about to lose their child benefit and have already suffered higher taxes because the threshold has gone down and National Insurance has gone up.

“We are talking about the squeezed middle. These are the people who would have to vote for Labour if they are going to get re-elected, so they should be very careful before they bring forward any proposals.”

In 2009, Labour proposed a reform of higher-rate pension tax relief which would have seen relief cut for people earning over £130,000.

The complex measures were abandoned by the coalition Government which implemented a £50,000 annual allowance while continuing to allow individuals to get relief at their marginal rate. It also announced a cut to the lifetime allowance from £1.8m to £1.5m from April 2012.

Lawson says any future reforms should be pursued through further cuts in the annual allowance. He says: “If politicians want to cut pension tax relief for higher-earners, then they should use the mechanism that already exists. Just cut the annual allowance.”

Responding to questions from Money Marketing on plans for future reforms at the CBI pensions conference earlier this month, Webb said: “Clearly, the LibDem manifesto said get rid of higher-rate relief altogether and the coalition agreement did not.

“In my view, the coalition has done well in streamlining the higher-rate relief restriction that the previous Government had brought in in a very Brown-esque manner. I am not aware of any plans to revisit that issue.”

Syndaxi Chartered Financial Planners managing director Rob Reid says some higher-rate taxpayers tend to work in senior management positions and may decide on pension policy for their respective firms. He says it is unlikely they will provide decent pensions for more junior staff if their tax relief is cut.

Reid says: “If the people at the top of businesses keep getting treated badly, what possible incentive is there for them to pay more money into their employees’ pensions? This is not the politics of common sense.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. While I am not surprised with the Labour party coming out with such hogwash it depresses me when I see the Conservatives considering such proposals.

    With one hand people are supposedly encouraged to save privately so as not to rely on the state at retirement and then with the other hand any incentive from saving for retirement is removed.

    So do we presume that if you are a higher rate tax payer in retirement that you do not pay higher rate tax on your pension income?? I doubt that’ll happen.

    Often a higher rate taxpayer is described as the mythical superwealthy – someone earning £42k a year is a higher rate tax payer and while better off than most they aren’t wealthy by any stretch of the imagination. More so now with child tax credit removed, child benefit about to be taken away, etc etc.

    I’m thoroughly fed up with governments bleeding us dry and getting very little in return.

    Do we have any choice as to who to vote for as they all appear to be the same – tax tax tax

  2. Christine Wallwork 13th October 2011 at 5:03 pm

    As per our recent conversation….

  3. Tax relief is NOT a cost to the government. It is simply allowing those earning modestly above average to keep a little more of their OWN money, provided it is saved towards retirement (when those same people are then unlikely to be a burden on the State).

    Those same people pay more in income tax, more in VAT, and more in NI contributions. They may invest – when they do they’ll pay CGT on profits and further income tax on interest and dividends. When they die, they pay Inheritance Tax. They are also likely to live in homes that are a little more expensive than average so they pay more in stamp duty (on purchasing) more on community charges etc etc. And guess what – they may have private health care (albeit they pay towards the NHS) and their kids may go to private school (but they pay towards State schools). They still only get their dustbins emptied once a fortnight, the police are still nowhere to be seen when their homes are burgled, and they pay more tax on petrol, airfares, energy bills and insurance premiums. And when they retire they pay tax on their pensions and are denied Age Allowance. All sounds pretty fair to layabouts on benefits, immigrants who have made no contribution whatsoever to the UK economy, and labour politicians with a policy driven by greed and envy (people like Prescott 2 Jags, Blair and the Wicked Witch who have cheated their way to £millions, and the Kinnock clan who have milked the fraudulent Euro-system for the past 20 years).

    The UK tax system is arbitrary and totally unfair. Why should I pay more than anyone else to use the same basic (and failing) infrastructure as a lower paid person. Indeed, taxation is simply a system whereby those in charge can feather their own nests (using laws that they have made up themselves) by fleecing everyone else. Yes ! – the government provides (inefficiently) a few services in return, but politicians have no God-given right to spend my money. Especially when they spend it on wastrels, foreign aid, enriching themselves and making f******* big bombs.

    If there is no higher rate tax relief then there is no point in making pension contributions !

  4. I strongly disagree with the removal of higher rate tax relief on pension contributions from people who pay the higher rate of income tax on the top slice of their earnings, not to mention paying more by way of NIC, as do their employers. And, of course, most civil servants are conveniently exempted from most of the tax restrictions that apply to everyone in the private sector. Why should those who pay the highest rates of tax on their income be denied corresponding rates of relief on what they allocate to an approved pension plan? So much for the Conservatives’ claim to being the champions of low rates of tax.

  5. Tax relief on pensions should be at the average rate of the lower and higher rate i.e. 30%

  6. Politicians and senior civil servants receive much of their higher rate tax relief by stealth. They would probably frame the proposed legislation so as to retain this stealth relief for themselves.

    The stealth relief occurs because there is no visible contribution by the government to cover the full cost of their unfunded schemes. If higher rate relief were to be abolished then this unfunded element not covered by contributions should be taxed as a benefit in kind at higher rates. It probably wouldn’t be, though. They know how to look after themselves.

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