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Pension rules may deter saving

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Changes to pensions tax relief for higher earners could be counterproductive, it has been claimed.

The Budget announced that, as from April 2011, pension contributions tax relief for those earning more than £150,000 will be cut so that it gradually tapers to 20 per cent at £180,000.

The measure has been criticised by some members of the insurance industry for removing an incentive to save and introducing an element of uncertainty into the savings system.

Trevor Matthews, the chief executive of Friends Provident, argued that targeting a particular group of savers now may mean that more people could be affected in the future.

He said: “Now that contract has been broken, and if it can be broken for one segment of savers now, it can be broken for others.”

The decision to change the pensions tax relief system for higher earners has also attracted concerns that it is unfair to the self-employed, in particular the rule which can restrict how much money is paid into pension funds.

To prepare for the new tax relief regime, and to prevent higher earners from upping their pension contributions before the reduced relief comes into effect, a special annual allowance was introduced as from 22 April 2009.

The allowance is £20,000 and is the limit on the amount of additional pensions savings for which full relief at the higher rate of tax can be given. The special annual allowance charge will only apply to someone with an annual income of £150,000 or more in any tax year from 2007/08 who increases the level of their pension savings on or after 22 April 2009 beyond their normal pension savings.

Normal savings pattern are those taken to be made on a quarterly or an even more frequent basis.

But it has been argued that the anti-forestalling rule, as it is known, could be unfair to self-employed people who tend to make a large one-off pensions payment each year after they know how much they have earned.

Ian Menzies-Conacher of the Chartered Institute of Taxation argued it was logical to say contributions must be on a regular basis but not to say a regular basis cannot be annual.

The Treasury has promised to consult on the rule to ensure that people who save less regularly are not treated unfairly.