Threat to pension savers

Office workers

Nearly four million Brits who currently pay into occupational pension schemes could be at risk of losing their employer contributions in light of changes to tax relief for higher earners.

Chancellor Alistair Darling revealed in April’s Budget that tax relief on pension contributions for people earning more than £150,000 will be reduced in 2011/12, from the current rate of 40% to 20%

An estimated 291,000 British taxpayers currently earn more than £150,000. However, despite the relatively small number of people affected, pension experts are concerned that the move could have wider consequences.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), warns that a reduction in tax relief for high earners could end up hurting the 3.7 million workers who currently pay into occupational pension schemes, where both employers and employees contribute.

“If senior executives can no longer fully benefit from pension saving, they may disengage from workplace pensions and be less inclined to provide high value pensions for those on average incomes,” Segars explains.

The NAPF is giving evidence to a House of Lords committee later today (20 May), and will argue that the measure should be dropped before 2011/12. The House of Lords’ Economic Affairs sub-committee is considering aspects of the Finance Bill.

The Association of British Insurers is also presenting evidence today. Its director of life and savings, Maggie Craig, is concerned the measures unveiled in the Budget are in conflict with the general principle that people who save for retirement are entitled to tax relief.

"The government's decision to restrict tax relief on pension contributions for people earning over £150,000 a year could have a damaging impact on pension savings in the UK,” she says. “While the measure itself will affect only a small number of very high earners, we are concerned that the principle that people who save for their retirement will get tax relief has been breached.

"Tax relief exists as compensation for responsible people who agree to defer some of their income now, so that they are less reliant on the public purse in retirement.”

She adds that any moves to reduce tax relief on pension contributions – either now or in the future – would seriously damage public trust and confidence in the UK's pension system.