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Why pension tax relief should not be tampered with

Aifa has written to the Chancellor urging against a possible reduction in higher-rate pension tax relief in next week’s Budget, saying it would undermine the concept that pension saving is not taxed twice.

The trade body’s letter to George Osborne comes amid reports that ministers are considering reducing the annual allowance for tax-privileged pension saving from £50,000 to £40,000, or potentially getting rid of higher-rate tax relief altogether.

The letter says: “We are concerned a reduction in tax relief for pensions will discourage individuals from investing in their pension fund, thereby reducing saving for retirement when increasing longevity means that people need greater encouragement to save. 

“It would undermine the Government’s policies of encouraging personal financial responsibility and reducing the burden on the welfare state.  Furthermore, such a step would further complicate the already hard-to-navigate pension regulatory framework.”

Aifa reminds Osborne the Conservatives promised to support saving through the tax system before they came to power, and of their pledge that they would look to avoid the uncertainty caused by “unpredictable and rushed changes to the tax system”.

The letter adds: “Although we recognise the argument that led to last year’s reduction of the annual allowance from £255,000 to £50,000, we are strongly opposed to this latest possible change.

“This measure will affect a vast number of people who are making sensible steps to ensure that they have adequate retirement savings.  It would undermine the principle that pension saving depends on – that income is not taxed twice. 

“We believe the effect of such a measure would be to reduce contributions to pensions, which would be a bad outcome for the future of society and the economy.”

Aifa’s letter follows wider industry calls to avoid further reforms to pension tax relief.

Last week, The Times newspaper carried a letter signed by industry bodies such as the Association of British Insurers and the Institute of Directors warning Osborne against any possible reform of higher-rate pension tax relief. 

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Gareth E K Smith 15th March 2012 at 4:01 pm

    I am a member of AIFA and i wish they had consulted me first, I am in favour of restricting pensions tax relief especially for the higher earners. In difficult times you cannot justify giving someone earning over £150,000, potentially £25,000 in tax relief. As for the encouraging saving for retirement baloney, the reason why high earners pay in up to the £50,000 is for the tax relief, because if someone is earning that amount of money annually there is no reason why they cannot save up in other investment vehicles to fund a comfortable lifestyle.

    A final point, when you see fewer police officers and fewer Nurses ask yourself was it right to give a company director earning over £25K tax relief, because it all comes out the of the same tax and spend pot.

  2. Gareth, the high earners who benefit “most” from tax relief are also those who contribute most to the tax system. On the basis of your point, should we ensure that there are more police officers and nurses to look after high earners than there are to look after the rest of us?

    High earners may benefit more in monetary terms but as long as that is proportionate to their contribution to the Treasury, I cannot see the issue with that.

  3. It defies belief that no one looks at the P&L for HMRC on pensions.

    HMRC pay out today knowing that they will get back more than they pay out today assuming that ASP terms are so penal on death.

    Higher rate tax payers contribute far more to GDP, pay more tax over their lifetime than any other section of society and in most cases are the least burdonsome on society.

    At worst the tax position is neutral, at best, provides positive upside.

    In any event, the effects of tampering with tax relief rates is impossible as it would also impact salary sacrifice principles which would affect all types of benefit arrangements covering millions of basic rate tax payers.

    Do the maths on the entire lifecycle of taxation in pensions, it easily provides the best fiscal return on tax payers money so stop whinging about it and stop buggering about with annual changes as it constantly undermines confidence of the consumer – the very people who on average are suffering a deficit of at least £250,000!!!

  4. Gareth

    Your view and attitude is what’s wrong with the screaming loony minority in this country. In your own example, do you not think that the person earning over £150k contributes enough in tax & NI to a society plauged by the workshy and benefit scroungers.

  5. Jeremy Newbegin 15th March 2012 at 5:17 pm

    Absolutley Gareth. As if higher rate earners need to be encouraged to save! We need to be encouraging the lower earners to save. However, most politicians know that if you put more money in lower earners pockets they spend it! That will be good for our economy. So abolishing higher rate tax relief on pensions has to be fair, and with this saving increase personal tax allowances.

  6. I’m afraid this argument doesn’t hold water as for the director to claim £25k tax relief he must first have already have contributed £25k in tax to the pot.

    You are suggesting that he should contribute out of taxed income, only to pay further income tax on the same money when he finally draws the income. Why do people view tax relief as a gift when all it is is a refund of what you have already paid?

  7. Gareth…spot on old son, tax relief should be restricted to the basic rate.!!!
    Why should the already wealthy get additional breaks!

  8. If the relief is to be restricted then the maximum amount of tax at the other end also needs to be capped – totherwise pensions would be a waste of time to HRT payers.

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