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Page last updated at 16:07 GMT, Wednesday, 22 April 2009 17:07 UK

Pensions blow for higher earners

UK currency
Some experts say the changes will not encourage saving for retirement

Plans to restrict tax relief on pensions for high earners have received a mixed response from experts.

The chancellor said that, from April 2011, tax relief on contributions to pensions would be reduced for people whose taxable income is over £150,000.

The relief will be tapered down so it is 20% for those earning over £180,000.

Some experts said that high earners would find alternative ways of saving for retirement, and the system would be "onerous" to administrate.

Mr Darling said that while it was important to encourage people to save for their retirement, he wanted to "address the anomaly" which saw a tiny proportion of workers taking a large slice of the money the government gives to help people save.

"It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1.5% of pension savers," he said in his Budget speech.

Savings need

People earning up to £150,000 will get 40% tax relief, with the relief tapering down to 20% for those with a taxable income of £180,000.

The move means that, instead of high earners only having to save £60 for every £100 they contribute to a pension, they will now have to save £80. This could affect about 300,000 people.

BUDGET 2009

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But more significantly, it could mean that some people are attracting only 20% tax relief on money which may eventually attract a 40% tax rate when they retire.

Experts suggest that those in company schemes will have the least flexibility.

With the plans set to go to consultation, advisers will now consider a number of ways in which high earners will reduce the impact of the proposed changes.

In the meantime, the government will bring in laws to prevent people ploughing money into their pension pot before the changes are made in 2011.

A key feature is that this accounts for all taxable income, not just people's wages.

Reaction

Malcolm McLean, of the Pensions Advisory Service, said that there had been some rumours that the higher rate tax relief was going to be abolished completely - affecting everyone earning more than £44,000.

Tax relief is there for a reason - it compensates responsible people who agree to defer some income by locking pension savings away until they retire
Maggie Craig, ABI

"A lot of higher earners, insurance companies and pension bodies will be breathing a collective sigh of relief," he said.

"People need to be encouraged to engage in pensions."

He said high earners might now look to schemes such as salary sacrifice to try to circumvent the effect of the changes.

Toby Ryland, tax partner at Blick Rothenberg, said: "I think people will find other ways of saving for retirement, such as putting money into property and shares, or using trusts and putting money offshore. This could make pensions more expensive for the rest of people."

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the measure was only projected to raise £200m in additional revenue in 2011/2012, while the administration of the changes would be extremely onerous for employers and the pensions industry to accommodate.

And Maggie Craig, director of savings the Association of British Insurers, said the move sent a "worrying message" to pension savers.

"Tax relief is there for a reason - it compensates responsible people who agree to defer some income by locking pension savings away until they retire," she said.




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