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Pensions tax relief measures need to be reconsidered

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Pension industry groups are warning that government plans to cut the tax relief available to higher earners on their pension contributions could have an adverse impact on the whole savings and retirement system.

Presenting evidence to the House of Lords economic affairs sub-committee, the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI) argued that the changes could have ramifications far beyond those people who are directly affected by the measure.

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

Maggie Craig, the director of savings at the ABI, said that limiting the relief could harm public trust and confidence in the UK’s pension system.

She added that the move would also impose an extra layer of complexity on pensions, going against the ‘A-Day’ measures introduced in 2006 in an effort to simplify the pensions tax regime.

The concern of the ABI is that the principle of tax relief for those who save for their retirements has been broken.

Ms Craig continued: “Tax relief exists as compensation for responsible people who agree to defer some of their income now, so that they are less reliant on the public purse in retirement.

“The government must not undermine the principle of tax relief on pension savings any further by continuing to remove tax relief, either now or in the future. To do so would mean less saving overall, and the prospect of a massively increased public bill for looking after people in retirement.”

Joanne Segars, chief executive of NAPF, saw the measure as potentially damaging to the stability of workplace pensions.

Ms Segars said: “If senior executives can no longer fully benefit from pension saving, they may disengage from workplace pensions and be less inclined to provide high value pensions for those on average incomes.”

She also cast doubt on the ability of the changes to bring in the £3 billion of extra revenue that the Treasury is looking for. This is because remuneration patterns for highly paid individuals are bound to reconfigure around more tax-efficient options.

Ms Segars concluded: “We think the government should maintain an open mind on whether or not to go ahead with the measures until after it has undertaken a full cost benefit analysis and options appraisal.”