Budget 2010: Govt to consult on pension tax relief plans

The Government is set to work with the industry on “alternative ways” to implement pension tax relief restrictions – and is considering reducing the annual allowance to as little as £30,000.

Chancellor George Osborne said: "Many businesses are alarmed at complexity. I have listened to those concerns, however, I must also protect £3.5bn revenue it would create.

"I will work with industry on raising same amount of revenue - potentially by reducing the annual allowance."

In a Treasury document - published alongside the Budget - the Government said "provisional analysis suggested an annual allowance in the region of £30,000 - £45,000 might deliver the necessary yield".

The document also confirmed the Government has "reservations" about the approach adopted in the Finance Act 2010 - saying it could have "unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness".

It said the Government wanted to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime - looking at a wide range of issues that will need further consideration.

However, Hargreaves Lansdown head of pensions research Tom McPhail said the move was not a done deal.

He said: "They have said they will consult on it - but we know what the pensions industry thinks.

"We have had unanimous feedback that this is what he should do. When he made this announcement, I am seeing it as something close to a done deal.

"Relative to where we were this is a proportionate and welcome change of direction."

Standard Life senior pensions policy manager Andrew Tully said a lower annual allowance would be an "attractive solution".

He said such a move would help because it "wouldn't turn higher earners completely off pensions".

The previous Labour government had rejected industry pleas to change the way it would implement pensions tax relief restrictions.

Its successor coalition Government made the u-turn after a wide section of the industry called for the abandonment of the last Government's plans to restrict pension tax relief for high earners.

National Association of Pension Funds chief executive Joanne Segars said the proposals as they stand would cost between £2.5bn to £3bn to implement and lead to senior corporate decision-makers disengaging from workplace pensions, eroding employer interest in the schemes.

The trade body suggested reducing the amount of pension contribution eligible for tax relief from £255,000 to about £50,000, which will limit the tax relief available to high earners, but in a way less harmful to pension provision.

"This will be less damaging to pension saving and cost far less to implement," Segars said.

The previous Labour government had rejected industry pleas to change the way it will implement pensions tax relief restrictions.

In his last Budget on March 24, Alistair Darling confirmed he would retain the restrictions originally announced in last year's budget and expanded in December's Pre-Budget Report.

The Treasury published a summary of the responses it received on its consultation on implementing the restriction of pensions tax relief - and outlined the Government's response and the next steps for developing the restriction ahead of its introduction in April 2011.

But it rejected pleas from the pensions industry to reduce the annual or lifetime allowance instead - saying such a move would hit lower earners.

It said: "A reduction in the annual or lifetime allowance would potentially apply to pension savers with much lower incomes, particularly in DB schemes. Furthermore, it would allow high-income individuals to continue to benefit from a higher rate of tax relief than other pension savers.

"In addition, alternative options could not be implemented fairly without making significant adjustments to the pensions tax system that would also add their own complexity.

It added: "The government does not propose any changes to the annual allowance or the lifetime allowance at this stage."

The March Budget also saw the government treble its estimate of the one-off costs that pension schemes, employers and individuals would incur as a result of the tax on higher earners' pension contributions it is introducing from 2011 (PP Online, March 25).