By Lois Avery
Pension tax relief is to be slashed for higher earners to one fifth of its current level, it has been announced.
The government revealed plans yesterday to change the tax rules, which will come into effect from next April.
The maximum lifetime size of a pension pot that can be accrued without paying tax will also drop from £1.8million to £1.5million.
The news has come as a blow to higher-rate tax payers and those who choose to pay lump sums into their pension pots to benefit from tax relief. It means any savings above these new limits will be subject to tax charges.
Higher earners and those who get significant salary increases are most likely to be affected and some experts are warning that it will turn people away from pension saving.
However, ministers say the plan would only affect around 100,000 people, 80 per cent of whom earn more than £100,000 a year and the government also says that high earners will continue to receive tax relief on pension savings up to the rate at which they pay income tax.
Financial Secretary to the Treasury Mark Hoban MP announced the plans and says the new proposals will help to simplify the pension savings system.
“We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
“The coalition government believes that our system is fair, will preserve incentives to save and - compared to the last government’s approach - will help UK businesses to attract and retain talent.”
The previous government proposed pension tax rules from April 2011 which would have seen higher rate tax relief on pension contributions gradually removed for higher earners depending on how much they save.
Andrew Tully, senior pensions policy manager at Standard Life has welcomed the new tax relief plans.
“An annual allowance works in the same way as ISA limits so is simple, clear and easy for people to understand. The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want,” he said.
