Budget 2010: Government to review pensions tax changes for high earners

The government is to work with the pensions industry to consider alternatives to the reduction of pensions tax relief for high earners.

In his Budget report, Chancellor George Osborne said the government would be willing to consider alternatives to this as long as it still achieved the £3.5 billion revenue that would be produced by reducing high earners’ pensions tax relief.

He added one option would be to reduce the annual allowance limit. Provisional analysis suggested an annual allowance in the region of £30,000 to £45,000 would be needed to achieve the government’s desired aims.

Marc Hommel, pensions partner at Pricewaterhousecoopers, said: “The Chancellor, following much pressure from the pensions industry, is going to work with the industry to review the high-earners pension tax regime and look to replace it with a reduced annual allowance limit.

“However, the revised regime would be required to raise the same overall tax yield, estimated to be £3.5 billion. In consequence, we should see a somewhat simpler system, and one that keeps higher-earners in the workplace pension system, at least for some of their savings.†

“With a lower annual allowance, employers will still need to review pension provision for higher-earners, including seeking different ways for long-term saving, but administration and compliance will be much simplified.

“News the government is to review the application of the higher-earners pensions tax is very welcome. A repeal of the previous ill thought-out proposals might help to motivate employers to continue to provide quality workplace pensions for all.”

Jane Beverley, principal and head of research at Punter Southall, said: “We previously described the previous government’s proposals as unworkable. I am pleased the Chancellor has listened and agrees with this analysis.

“A reduced annual allowance would mean that saving in a pension would remain a viable option for all individuals, including those on higher incomes and would leave senior executives engaged in the pension schemes they provide for their employees. An annual allowance approach should be a much easier system for pension schemes to implement and would avoid the cliff-edges that are innate under the high income excess relief charge.

“It will be important the government takes care to learn the lessons of the past and does not overcomplicate any alternative method nor hasten the decline of final salary schemes. Given the importance of getting the details right second time round, we would urge the government to consider postponing the introduction of the regime to April 2012 and continuing the anti-forestalling regime for one further year.”

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