Pensions tax relief proposals in UK need fine tuning to avoid unfairly penalising certain sectors, experts warn

News - Savings

Written by Ray Clancy

Wednesday, 01 September 2010 10:28

UK pensions tax relief changes risk ensnaring non higher earners and unfairly penalising some sectors, it is claimed.

Government plans to restrict pensions tax relief for high earners are sound in principle but need some urgent fine-tuning, according to pensions experts.

The National Association of Pension Funds (NAPF) is warning that the current proposals risk unfairly penalising those who are promoted or made redundant, or who have to retire early because of illness.

The inclusion of ‘past service’ into the planned tax workings will also hit those with final salary pensions who have spent a long time with their company. These individuals could find that a new assessment of their defined benefit or ‘final salary’ pension benefits leaves them exposed to tax charges aimed at much higher earners.

The proposals come as the Government seeks to raise revenue and target tax relief away from the UK’s wealthiest individuals. The NAPF campaigned for a reduction in the Annual Allowance down from £255,000 to around £45,000 as being the best option.

This approach restricts the tax break on offer to higher earners but, unlike the system proposed under the Labour government, does not encourage them to quit their workplace pensions, a move which would have undermined pension provision for all, it says.

While the NAPF is pleased that the Government has adopted its overall suggestion, the UK’s leading pensions body is concerned that unintended consequences will punish savers who are not high earners.

‘The Government has got the overall approach right, but this is quite a big shift in policy, and work needs to be done on the detail to remove any unintended consequences,’ said Joanne Segars, NAPF chief executive.

‘It’s unfair that people losing their jobs or retiring early due to ill health will be hit with a bigger tax bill. We also don’t think it is right that past service should be counted in the way the Government suggests. The planned regime has thrown up a series of issues that must now be resolved. If they are not, many people risk getting caught up in a bewildering and expensive set of rules that were aimed at those earning much more,’ she added.

In its response to the HMT/HMRC consultation on restricting pensions tax relief, the NAPF calls on Government to allow those getting ‘one off’ benefits due to early retirement or redundancy to carry forward some of those benefits into the Annual Allowance for up to five years.

It also says the government should carefully reconsider whether to include pre April 2011 accrued service in pension input calculations and clarify thinking around ill health retirement, which includes those leaving work due to permanent incapacity.

It should also look at excluding deferred pension scheme members from the reduced Annual Allowance test as to include them would create an administrative headache for employers and review its plans to cap pension tax relief on employee pension contributions at 40%. The NAPF believes this would add to complexity, would not yield the amount forecasted.

The NAPF is the leading voice of workplace pensions in the UK representing 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.