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Pension funds attack allowance changes

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12th Mar 2010
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The National Association for Pension Funds (NAPF) has called on the government to review its plans to reduce the amount of tax relief available for those with income of more than £150,000 a year, arguing that the changes would be expensive to implement and undermine pension provision for less well off employees.

Under the proposals, set to be introduced from April 2011, tax relief on pension contributions would be restricted to the basic rate for those with income of over £180,000; those in the band £150,000 to £180,000 will see their tax relief reduced proportionately until they reach the £180,000 limit; NAPF argues that the changes would have a series of unintended consequences.

Workers earning salaries of between £40,000-80,000 who receive a promotion, relocation expenses or a redundancy payment they could be caught under the proposed regime and earning around £130,000 could be affected if employers’ pension contributions push them over the proposed £150,000 limit.

NAPF claimed that implementing the scheme would cost up to 10 times more than the Treasury estimated, posing “high and disproportionate costs” for businesses that could encourage many companies to close their schemes “at a time when workplace pensions are in a fragile state”.

The Treasury put the cost of implementing the scheme at £110m, based on an assumption of a £275 cost per individual case for working out the necessary calculations. NAPF estimated the figure was more like £1,000-2,000. Providing financial advice and guidance to affected staff would cost employers as much as £210-500m rather than the Treasury estimate of £60m. IT, legal and actuarial fees would add to those figures, the association added.

NAPF’s alternative suggestion is to reduce the Annual Allowance from £245,000 to between £45-60,000, which would still enable the government to similar amounts of additional tax revenues to its current proposals, but would not have the unintended consequences described above.
 
“We are asking the government to stop, look and listen,” said NAPF policy director Nigel Peaple. “It should stop its plans to introduce an entirely new approach to pensions taxation for high earners, look carefully at our evidence of the threat posed to other pension savers, and listen to our proposals for an alternative approach.”

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