UK - A parliamentary committee has warned that changes to the UK pension tax relief system for higher earners undermine existing rules which were overhauled in 2006 and risk sapping confidence by removing the "simplicity, consistency and certainty" around the tax system.

Members of the House of Lords' select committee on economic affairs have published the findings of their examination into the Finance Bill 2009, which focused on a number of specific issues including the announcement that higher rate tax relief for those earning over £150,000 would reduce from 40% to 20% beginning in April 2011, with anti-forestalling measures introduced immediately. (See earlier IPE article: UK Budget cuts higher rate tax relief)

Following a series of evidence sessions from both Treasury officials and private sector representatives, such as the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI), the Committee concluded "restrictions to relief for pensions contributions risk damaging pensions savings". (See earlier IPE article: Tax relief cut seen as 'thin end of wedge')

The report, published today, accepted that the government "has to be free to make the changes it sees fit" but it noted just three years ago pension simplification merged eight tax regimes into one. It therefore argued that "to make significant changes so soon has undermined the simplicity, consistency and certainty needed and so risks a reduction in pension savings".

It also sided with comments made by the NAPF, ABI and Confederation of British Industry (CBI) that while the number of individuals directly affected by the changes "may be relatively small, they will be senior managers who will be influential in determining pensions policy for many company employees".

The report argued officials did not appear to accept that "the impact of changes on the pensions industry could undermine confidence in it", and warned the "precedent may be seen as the thin end of the wedge in reducing relief more generally, so risking a reduction in pensions savings".

In addition, the committee recommended the government should pay "considerable attention" in its future consultation on the new 2011 regime to making sure there remains a "level playing-field" between defined benefit (DB) and defined contribution (DC) schemes, while the consultations should conclude "as soon as reasonably possible in order to allow people to make their plans".

Other recommendations from the Committee included "special consideration" of the impact of the changes on the marginal rate of income tax for those receiving a pay rise above the £150,000 threshold, as suggestions had been put forward tax rates could exceed 100%, and the Committee "were not wholly reassured by the answers we were given that officials had fully taken that point on board".

The Committee, comprising 12 members of the House of Lords, also questioned the necessity of introducing the anti-forestalling measures as it argued "ministers were well aware of the generosity of the relief for high income individuals and should not have been surprised at the proportion of the cost which was going to them", adding " we think that the measure may have been the wrong judgment".

However, as the anti-forestalling measures applied from 22 April 2009, the Committee said two groups of members that fall foul of the measures by not making regular contributions on a quarterly basis as required by the legislation - the self-employed and those who have practical reasons for one-off payments such as redundancy or pre-retirement top-ups.

The committee warned in its report that if "bespoke solutions cannot be found for individuals who fall into these categories, we recommend as a fall back that the special annual allowance [currently £20,000] be increased significantly".

Lord Vallance, chairman of the Committee, said: "We are concerned the government has underestimated the risk that changing the long standing rule that relief for pensions contributions should be given at an individual's marginal rate may damage pensions savings."

He argued that at a time when most people accept the need to encourage greater pension saving, "the proposed change may have a far wider effect than on the comparatively small number of people directly affected".

Vallance added: "We trust the government will give these issues serious consideration during the consultations that are promised before the substantive changes come into effect in 2011. We would also invite the government to consider our views on the anti-forestalling provisions before the Finance Bill is debated again in the Commons and make suggestions as to how our concerns can be resolved."

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