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.
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.”