Pension industry calls for £50k cap
The pensions industry is unanimous in its support of a £50,000 annual cap on pension contributions in place of the tortuously complex pension tax that is due to arrive in April of next year.
The new government has an opportunity in the emergency budget to adopt this £50,000 cap in place of the pension tax drawn up by Labour. This cap will raise approximately the same amount for the Treasury as the pension tax according to calculations by Legal and General's Pensions Strategy Director, Adrian Boulding. It will also serve to limit the tax relief available to high earners.
Unlike the pension tax, a contribution cap will not cripple the private pension system by introducing a new maze of taxation. With the cap in place the current government then has some time to look at the design of the pension system as a whole (including the issue of tax relief) in a considered manner. Too much pension policy has already been written in a haphazard and impulsive fashion.
Tom McPhail, Head of Pensions Research: "The beast is dead but the tentacles of the former Labour government are still reaching for the private pension system in the form of a monstrously complicated pension tax. Capping pension contributions at £50,000 is a much simpler way to achieve the same goal that has the support of the whole pensions industry. We conducted an informal survey of the pensions industry, including trade bodies, pensions lawyers, actuaries, fund managers and IFAs. We asked them which was the more appropriate way to restrict the tax relief of high earners; through Labour's pension tax, or through a cap on pension contributions. They unanimously opted for the contribution cap."
The pensions tax will be applied to those earning in excess of £130,000, but it also threatens the workplace pension savings of people further down the income scale. Over three quarters (77 percent) of employers surveyed by PricewaterhouseCoopers in June 2009 said that the announcement of the new pension tax reduced their motivation to provide workplace pensions.
The incoming pension tax is a pension policy driven by the desperate financial situation the previous government found themselves in. We would like to see pension policy driven by a desire to improve our pension system. So far the suggestions of our new coalition government have been encouraging in this respect. They can add to their credentials as progressive reformers by scrapping Labour's pension tax and introducing the contribution cap as an interim measure while they calmly consider the options for building a better pension system.
10 June 2010
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