UK - MPs will today be told the UK government's decision to reduce tax relief for higher earners from 40% to 20% would "seriously damage public trust and confidence" in pensions and might even "destabilise" workplace pensions.
The Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) have voiced their criticism of the Budget measure ahead of their appearance in front of the House of Lords Economic Affairs Finance Bill sub-committee later today.
Maggie Craig, director of life and savings at the ABI, said the decision to restrict tax relief for those earning over £150,000 from 1 April 2011 "could have a damaging impact on pension savings in the UK" and would also add an "extra layer of complexity to pensions" in direct contradiction of the "A-Day" simplification regime introduced in 2006. (See earlier IPE article: UK Budget cuts higher rate tax relief)
Craig said: "While the measure itself will affect only a small number of very high earners, we are concerned that the principle that people who save for their retirement will get tax relief has been breached. 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."
She warned the government and opposition "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" as this would "seriously damage public trust and confidence in the UK's pension system. That would mean less saving overall, and the prospect of a massively increased public bill for looking after people in retirement".
Meanwhile, Joanne Segars, chief executive of the NAPF, argued the proposed changes to pensions tax relief "could destabilise workplace pensions at a time when they are already under pressure", on the basis that if senior executives no longer fully benefit from pension saving, they may be less inclined to provide high value pensions for those on average incomes.
Segars also agreed with Craig that the changes "breach the long established principle of tax-exempt pensions contributions and the policy recently introduced under this government of pensions simplification."
In addition, she questioned whether the changes would bring in the estimated £3bn of tax revenue, as remuneration patterns for high earners "are bound to reconfigure around more tax-efficient options".
"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," added Segars.
The evidence session to the House of Lords will this afternoon include witnesses from the ABI, the NAPF, British Land and the Royal Institute of Chartered Surveyors (RICS), on certain aspects of the Finance Bill 2009, such as Real Estate Investment Trusts (REITs) and the "process leading to the restriction on relief for pensions and the anti-forestalling provisions in the Finance Bill, in the light of experience of the new pensions regime since its introduction in 2006".
However, the committee noted it "will not consider restriction of relief in principle nor the level at which restriction is to be introduced".
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