Market View: Industry rails against Labour tax relief cuts

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Market View: Industry rails against Labour tax relief cuts

Pensions sector professionals and commentators have expressed concerns over the Labour party’s tax relief plans, warning that the proposed changes would affect middle-income savers.

Last Friday (27 February), the Labour party said if it was elected in May it would cut the lifetime allowance from the current £1.25m to £1m, reduce the annual allowance to £30,000 from £40,000, and would cut tax relief on incomes over £150,000 from 40 per cent to 20 per cent.

Ed Miliband confirmed the plans in addition to those previously announced on restricting pension tax relief to 20 per cent for additional rate taxpayers. The measures would raise billions that will be used, in part, to fund a pledge to reduce maximum tuition fees from £9,000 to £6,000.

The proposals are likely to poll well with an electorate which is currently running short on sympathy for higher earners at a time of austerity.

Some have also suggested that pension tax relief, which cost the Exchequer around £35bn last year, disproportionately favour higher rate taxpayers, who according to Friends Life calculations make around half of pension contributions but take around 75 per cent of the tax incentive.

Adrian Walker, retirement planning manager at Old Mutual Wealth, said that reducing pension tax relief for people earning over £150,000 immediately down to 20 per cent with no graduation “seems slightly bizarre”.

Mr Walker said: “It makes pensions look an unattractive savings vehicle for those people who are likely to be at least higher rate tax payers in retirement.

“If the proposal to reduce the lifetime allowance further to £1m comes in, it will have been reduced by just over 45 per cent in 5-6 years - on that basis it could be under £600,000 by end of the next parliament.”

Huw Evans, director general at Association of British Insurers, said that the pensions and long-term savings industry supports reform of tax relief but that this was not the way to do it.

Mr Evans said: “We need a focus on reforming the pension tax relief system as a whole to make it fairer, better value and encourage saving from middle earners, rather than just piecemeal cutting back the existing system to pay for other policy objectives.”

Stephen Green, a senior consultant at Towers Watson, warned that much would depend on the currently unknown details and that the reduction of the lifetime allowance should be a “real concern” for high earning members in their fifties.

Mr Green said that for someone earning £70,000 in a typical final salary scheme, a £30,000 annual allowance would bite if they got a pay rise of at least 4 per cent in their thirtieth year of service when the consumer price index inflation was 2 per cent.

He said that if a pay rise were 5 per cent, they could face a tax bill of £2,336.

“But they might not have to pay this if a Labour government allowed unused allowances from earlier years to be carried forward, as legislation currently permits... [A]ny carried-forward unused allowances will ultimately run out so a tax charge could arise every year thereafter if pay continues rising quickly.”

Mr Green added that the coalition has twice cut the lifetime allowance and on both occasions it offered protection for people whose existing savings could take them above the reduced limit.

“We presume that Labour would do the same but would like to see that made clear. The potential impact of a reduced lifetime allowance on retirement should be a real concern now for high earning members in their fifties.”

The National Association of Pension Funds said that in particular the incremental shifts in pension tax policy is not the right way to manage the future retirement savings of millions in the UK.

Joanne Segars, chief executive of the Napf, said: “Such a move by any government threatens to undermine the confidence of pension savers, employers and schemes alike. These changes are likely to affect many middle-income savers, such as senior nurses and senior teachers.

“We need a proper debate on tax in the broader context of pensions and retirement savings, and this should be overseen by an independent retirement savings commission to ensure the long-term needs of savers remain at the very heart of the government’s approach.”

ruth.gillbe@ft.com