12 March 2012

Letter to the [UK] Chancellor on pensions tax relief

"Chancellor, the UK’s pension system is in a fragile state and with the crucial auto-enrolment reforms now only a few months away, we urge you to stand firm and to resist any suggestions to restrict or withdraw the tax breaks currently available to pension investors.

The changes introduced this time last year are already projected to raise an additional £4 billion a year for the exchequer from UK investors’ pensions. It is already more than enough.

Some members of the present Government are known to favour a restriction of tax relief on pension contributions to the basic rate of income tax. As the previous government found to its cost, any attempt to divorce the rate of contribution tax relief from individuals’ income tax rates will only result in an unworkably complicated set of pension rules.

This complexity will undermine investors’ willingness to engage with pension planning. It will also undermine support for pensions from those higher rate taxpayers who control businesses’ pension expenditure and on whose support the government will rely in making a success of auto-enrolment.

Even someone earning under £50,000 a year, receiving auto-enrolment levels of pension contributions could suffer a tax charge of £750 a year in respect of their pension contributions, if tax relief were capped at 20 per cent. A typical final salary pension scheme member on £50,000 a year could suffer an annual tax charge of over £2,500.

Losing £750 a year would mean a 30-year-old drawing a pension at 65 would retire with a fund worth nearly £50,000 (£47,800) less (based on 7 per cent growth, a 1 per cent annual management charge and 2.5 per cent inflation). Convert the fund into an annuity and it will be equivalent to losing £2,870 annual retirement income (based on a 6 per cent level annuity rate).

There have also been suggestions that the Government could remove or reduce the tax free lump sum entitlement from retiring pension investors. For many years to come this would only raise any revenue if it were applied to existing pension pots, yet such a move would catastrophically undermine investors’ trust in the Government not to renege on past promises.

Even a restriction to the Annual Allowance, only a year after it was slashed from £255,000 to £50,000, would send a message of no confidence to prospective pension investors. When the government reduced the allowance to £50,000 it committed to looking at increasing the limit at the end of the forecast period in 2015-16.

To announce now any plans to reduce the allowance further instead would send a message to prospective investors that the Government is willing to treat their retirement savings as a convenient piggy bank into which it is happy to dip whenever cash runs short."

Full letter

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