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Suggestions for pension tax relief

Retirement | SIPP

By Justin Modray, published 08 June 2010.
Helpful? 0

One of the more eagerly awaiting announcements in the June 22 emergency Budget is what will happen to higher rate tax relief on pension contributions. I've got a suggestion and would love to hear yours.

There are fears that higher rate tax relief could be scrapped altogether, as proposed by the LibDems. While I think this is unlikely, something, undoubtedly, must change.

Government estimates for 2008/09 suggest the top 2% of earners received a quarter of the total £18.9 billion net income tax relief given, worth an average £20,000 per person (implying gross pension contributions of £50,000). By contrast, the bottom 80% of earners received a third, worth an average £1,000 per person (implying gross pension contributions of £5,000 with basic rate relief).

In these austere times it’s hard to make an argument for letting high earners enjoy such high levels of tax relief at the expense of everyone else.     

However, the previous government’s plans to scrap higher rate tax relief from 6 April 2011 for those earning £150,000 or more led to the pensions industry unsurprisingly being up in arms. Standard Life has even gone as far as stating the true costs of implementing the rules will be £2.5 billion and not the £345 million estimated by HM Treasury. I’m not sure I fully agree with Standard Life’s figures (for example it assumes 450,000 employees will each spend £3,000 on financial advice – a total of £1.35 billion) but I agree with the sentiment that the proposed rule change is ill thought out and costly.

I think the key is that any change must be simple and avoid disincetivising high earners from making even modest pension provision.

I’d suggest simply restricting tax relief to the first £20,000 of pension contributions each year for everyone. By my reckoning this is ample for almost everyone to build up a decent pension and should save HM Treasury around £5 billion a year.

If you have other suggestions please tell us all by posting below.

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