Pension savers could face dramatic reductions in tax relief

Pension savers could face dramatic reductions in tax relief

29 July 2010 / by Lois Avery

Pension tax relief for higher earners could be lowered to as little as £40,000 after the Government’s plan received backing.

The coalition is planning to replace the big tax changes that Labour had put in place, starting next April with pension tax relief in line for a major shakeup.

At the moment the amount a pension pot can grow tax free is £255,000 a year but the new coalition has received support from the National Association of Pension Funds (NAPF) for its plans to reduce the tax exemption to as little as  £40,000 a year in a move that would raise an extra £4.6bn by 2014-15.

Alistair Darling, the shadow chancellor, originally proposed  to cut tax relief for those earning more than £130,000.

Joanne Segars, chief executive of the National Association of Pension Funds, said: “It’s a simpler approach that will encourage higher earners to stay in their workplace pensions, so helping protect pensions saving for all staff.”

However, speaking to the BBC Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA) said the coalition's plans might affect more people in the tax net who were much lower paid than those targeted by Labour’s plans for a £130,000 limit.

"It is still likely that many earning a lot less than the £130,000 could be affected where they are in a defined benefit (final salary) scheme," he said.

"This will depend on the valuation method and length of enrolment in the scheme but could affect even those on half the £130,000 especially if they make additional voluntary contributions (AVCs.”

Consultation on the new proposals will run over the next few months, allowing changes to be implemented in the 2011 Finance Act, to take effect next April.

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