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Ransacking retirement

So the Government raided pensions… again.

While some pundits are relieved the Budget measures to cut tax relief enjoyed by the highest earners were not as far reaching as had been feared, the general reaction was still outrage.

In a nutshell, the changes, which come into play from April 2011, will see the tax breaks on contributions made by those earning over £150,000 in total income, not just salary, gradually shrink from 40 per cent so that people on £180,000 or more get the basic rate of 20 per cent.

But Chancellor Alistair Darling has been cunning and quashed the possibility of a buy-now-while-stocks-last rush to get cash in before the new rules take effect.

And he has done it in an extremely convoluted way.

The forestalling measures, put simply, involve limiting tax relief as of yesterday for people who have earned over £150,000 in this and any of the previous two tax years, unless the contributions are less than £20,000 or have been regularly above this amount.

Darling has also effectively killed off the chance of using salary sacrifice to get around the changes because the so-called special allowance includes employer contributions as well as employees.


Darling says the move will earn the Treasury £3.1bn or about half of what they dish out on higher rate tax relief at the moment. It is expected to whack upwards of 225,000 people, according to Standard Life.

Hargreaves Lansdown pensions analyst Laith Khalaf says the proposal will see the highest earners snub pension savings in future.

He says: “This measure will cause huge upheaval for employers, advisers and pension providers and will ultimately lead those earning over £150,000 to seek alternative vehicles for their retirement savings.”

Kohn Cougar managing director Roddy Kohn agrees but believes the move will have more sweeping consequences.

He says: “High-net worth individuals will not be as easily persuaded that it is in their best interests to continue making pension contributions because even with tax relief at 40 per cent many of them harped on about their lack of access to capital so at 20 per cent the incentive is not there.

“I also think the move will harm pensions in general because the message that most people will take home is that pensions are not as good a tax break. It is colouring the whole public perception as to whether pensions are good value or not even though this only applies to higher earners.”

Association of Independent Financial Advisers director general Chris Cummings says: “The decision to immediately limit additional pension contributions from higher earners risks jeopardising the sensible savings plans of wealth creators. Although this is restricted to a small group of people it is a worrying and complicated step from the Government. And at such a short time after A-Day it can be seen as a short-term response instead of long-term thinking.”

Meanwhile, pensions expert Ros Altmann slammed the Government for not using the money skimmed off pensions to boost the retirement provisions of poorer people.

She says: “The Government claimed this Budget was about fairness but this measure is not about farness, it is about raising money. Fairness would mean using the revenue raised to help other people achieve better pensions.

“I could support that and have sympathy with the view that top rate tax relief could be better targeted by improving incentives for ordinary people but this proposal amounts to taking money away from pensions and not putting anything back. This measure will merely tinker at the edges and add more complexity without any benefits.”

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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Dependant on a state
    The UK once had the best private pension provision of all EU states, look at it now, first there was retrospective taxation of funds, then the failed Stakeholder, the Sandler Suite and the death of OPS. Either they don’t know that all their actions are decimating private pensions in which case it could be argued it is negligence, or they do know what they are doing and that could be construed as misfeasance, or misconduct in public office. Either way this country is a far poorer, and more complicated, place than it was in 1997. I actually voted for these morons!

  2. Pensions
    God !!! Excuse blasphemy !! Am I fed up with the press and Daily Mail readers commenting on what they dont really understand !!! How many individuals in the UK earn more than £150,000 per annum and fund at a level of more than £20,000 p a in total per annum into their pension funds???? Most of my clients do not. Those who dont live in the real world ie those who write the rubbish should speak to the majority of IFAs in the Uk and find out their views. By this I mean IFAs NOT in the Greater London region who dont exagerate their client banketc. I do have a few clients where this may apply but having spoken to them since yesterday’s announcement the reaction has not been too negative. They already have funds larger than most will ever have.

  3. Pensions destroyed
    The whole tax neutrality of pensions has been destroyed for high earners. On vesting, the capital is taxed as well as the accumulated return. Why would anyone invest 80 to get an after tax income stream worth 60?

  4. Tax on Pension Contributions
    I have long held the veiw that any pension contribution by individuals represents poor value for money, whatever the releif against contributions. 1) No (or limited) access to Capital. 2) Unnatractive Annuity terms, or 3) If you can’t stomach an annuity, and then suffer early death, a 35%, 70%, or for many, an 82% tax charge on the remaining fund. This is simply, or should be, the final nail in the Pension coffin, at least when funded by the individual. Why would any sane person put their own money into such a flawed arrangement? I do though accept that a different argument can be presented for Employer funded schemes.

  5. Tax & Pensions
    About ten/eleven years ago this Government took away the tax relief on Pension Funds, in the name of a ‘level playing field’ for taxpayers and also to raise £6,000m a year.
    Commentators said ‘what a shrewd move, nobody will notice for the next 10 or 20 years.’
    What a load of rubbish, most companies now only offer Defined Contribution schemes because DB schemes are not sustainable for all but the largest employers.
    The Governments latest move is just another money raising exercise from the wealth creators in our community.
    If they really want to find extra money from pensions then they need to tackle the protected Public Sector schemes.

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