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Treasury heavily underestimates cost of pension tax relief restrictions

The Treasury has underestimated the cost of implementing the new restrictions to tax relief for higher earners by seven times, according to Standard Life.

The insurer says the true cost of collecting the additional tax is almost as much as the £3.6bn worth of tax collected.

The Treasury’s impact assessment estimates the implementation costs to be around £345m but Standard Life has tallied the real cost to be nearer £2.5bn.

It says the initial costs for employers will be around £525m while the initial cost for employees will be around £1.38bn.

The insurer estimates the changes to initially cost pension schemes and providers another £525m and HM Revenue and Customs’ bill will be around £75m.

The department has also hugely underestimated the ongoing annual compliance costs, according to the firm. The Treasury suggests these will total £130m but Standard Life estimates the true annual burden to be as high as £435m.

It says ongoing costs for employers will total around £80m and employees will face costs of £273m on an ongoing basis. Standard Life says ongoing costs for pension schemes and providers will be around £52.6m and HMRC will have to pay out ongoing costs of £30m.

The insurer says the Treasury has failed to account for major costs such as individual advice and the extra expenses for providers in building alternative products.

It estimates that reducing the annual allowance, a popular alternative, would cost £459m for implementation, saving over £2bn immediately and have an ongoing annual cost of £118m.

Head of pensions policy John Lawson (pictured) says: “This is inefficiency gone mad – pension savers, their employers and their pension schemes will have to spend £2.5bn so that HM Treasury can collect £3.6bn of tax.

“Given the burdens faced by people as a result of the recession, adding further unnecessary bureaucratic cost adds insult to injury. The problem stems from the mind-boggling complexity of these rules. A simple reduction to the existing annual allowance would cost only a fraction of this to implement.”


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Steven Farrall (Adviser Alliance) 8th June 2010 at 1:17 pm

    Re the last paragraph – egssaktly. Ditch Brown’s Bonker’s Complexity now. Just reduce the annual allowance and / or restrict pensions tax relief to the basic (let’s call it ‘standard’) rate of tax.

  2. Surely one of the main principles of computerisation/technology is that change can be rapidly implemented and at little cost…?

    Main concern though must be that The Treasury (or perhaps Standard Life) are unable to provide acurate financial forecasts..?

    Very worrying and yet not surprising.

  3. Michael Fallas 8th June 2010 at 1:53 pm

    Is anyone surprised?

    The idea of keeping anything simple went out of the window with New Labour.

    Complexisty costs.

    “Pension Simplification” was just another ruse to confuse people even more.

    Regulation was the holy grail of financial probity but ended up as a “dogs dinner” of rules and laws by unaccountable “gods” who are unaccountable for their own mistakes while judging and sentencing others about theirs. It which will take years to correct if anyone realises that is.

  4. Julian Stevens 8th June 2010 at 2:09 pm

    Apart from anything else, I don’t see why the people who contribute most to the national purse in terms of tax AND NIC should be denied relief on thei pension contributions at their highest rate of tax.

    If this logic is followed through, then any tax uplift on pension contributions from non-tax payers should also be removed.

  5. A pension is deferred pay, correct? So when benefits start to be drawn tax will be paid, correct? OK, so this will be in the future whereas we need the cash now. So how about a scheme based on what War Loan was supposed to be? Tax relief limited to basic rate now but higher rate taxpayers issued with credit notes that will be added to their personal allowances when they retire, thereby increasing their tax free income in retirement. Some will lose out – those who die without drawing benefits, those who lose their vouchers and don’t claim and those who go somewhere else to live. Taxman gets his money now, electorate don’t feel quite so robbed and even the politicians will like it – it moves the problem on to a future government!

  6. Richard Jacobs 8th June 2010 at 6:05 pm

    Lets be realistic higher rate relief on pension contributions is going to be limited in some way. The previous Government as in all they did asked the civil servants to come up with a solution and what do we get? The most expensive and complicated system possible. Why? to protect their jobs. Am I cynical, I don’t think so. Look at everything else.

    So what is the solution. We must all now take the opportunity offered by the new Government to offer solutions for cost cutting. We must be realistic but we can and must contribute to the debate and not do nothing but moan afterwards. So come on Helen start a big Headlined debate now to go to Government on ways to realistically simplify system, save costs, but whilst still being Politically acceptable. How about a Summit Meeting of pension Guru’s (p.s.Don’t forget me!)

    My starters……1) Scrap Labour plans for pension tax relief but go forward with a maximum contribution of £50,000 2) Keep compulsory enrolement to pensions based on P60 earnings up to age 55 with some new minimum but scrap Nest keep stakeholder. 3) Scrap ASP but keep USP with 40% tax charge on distribution of Funds

  7. Crazy gang IFA member 9th June 2010 at 8:57 am

    KISS is a great philosophy, but something the government has never been good at. The same problem lies with the proposals for CGT. Dont they ever learn???

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