BUDGET '09: Govt sending out 'wrong message' on pensions

Removing higher-rate tax relief for the well paid will undermine the A-Day agreement and sends out the wrong message on pension savings.

Industry figures have criticised the move to remove tax relief for those earning more than £150,000 from April 2011.

From April 2011, high earners will only receive basic level tax relief on contributions, currently 20%. In addition, restrictions will be put in place today, limiting contributions to a 'normal' level, with any increase in pension contributions worth over £20,000 taxed at the new 45% rate.

Standard Life predicts the changes will affect 291,000 pension savers in the UK.

The ABI has criticised the move for increasing the administrative burden for pension schemes and ultimately increasing costs for members.

"This move is likely to be expensive to implement and will reintroduce complexity and change to the pension system, just three years after the Government's 'A-Day' reforms. It is vital there is detailed and effective consultation on the implementation of these changes," says the ABI's director of Life & Savings, Maggie Craig.

Aegon's head of pensions development, Rachel Vahey, says the move could provoke a rejection of pensions saving stretching beyond those directly affected.

"This undermines the A-day agreement which was designed to promote long-term pension saving, using the standard Lifetime Allowance to prevent abuse of the system by the rich," she says.

"Today's changes send a message that goes wider than the people directly affected. We can't afford a vicious circle of less engagement with pensions leading to increased temptation for politicians to cut their value."

Martin Palmer, head of corporate pension marketing at Friends Provident, agrees the move will be damaging for UK savers.

"Removing this incentive to save particularly at a time when economic circumstances have affected people's views over the value of pension saving sends completely the wrong message," he says.

"The UK needs to save more for its retirement rather than less as the level of engagement in pension planning in the UK is already pitifully low."

John.Bakie@incisivemedia.com