Commenting on the possible changes to pensions in tomorrow's budget, Martin Palmer, Head of Corporate Benefits Marketing at Friends Life, said:
"A number of changes to pensions tax relief have been mooted, and we seriously hope that's all they are- discussion points. At a time when we need to encourage a savings culture at all levels of society and are about to launch auto-enrolment to nudge people towards pension contributions, making changes to the tax relief on pensions in any form could have serious implications. Although the suggested measures are designed to affect high earners, measures which disincentivise saving are likely to impact everyone. If decision makers within companies are disincentivised we can hardly expect them to support and encourage their lower paid employees at the same time.
"Removal of higher rate tax relief would make pensions a lot less attractive as a savings vehicle to higher rate tax payers, undermining pensions when the launch of auto-enrolment is imminent. Our verdict is that such a move is unlikely. If the chancellor did decide to go down this route, we believe the more likely option is that tax relief would be removed only for those earning over a certain threshold, for example £100,000. Whilst the pros of this are short term gains, long term social and economic problems are likely to arise and ultimately employer contributions into pensions may be levelled down to the minimum levels required under auto-enrolment, with pensions becoming a less attractive tool for employers to recruit and retain quality employees.
"Decreases to annual and lifetime contribution limits made in October 2010 don't come into force until 6 April yet more changes may be introduced before these are in place. An easy hit for the government from an implementation point of view as it builds on existing policy this would seriously undermine any intention to encourage saving. What consumers need is a period of stability to gain trust and confidence in saving. Our verdict is that this is the most likely measure to change, but we wouldn't bank on it.
"The tax free cash lump sum of 25% available to most people over 55 is a valuable incentive for pension saving. Removing it would be highly unpopular, and would cause serious problems for consumers who are reliant on the sum to pay off their mortgage. The con here is that it would not generate a lot of revenue for the government in the short term unless of course it is applied to existing accrued benefits as well as future benefits - (this would be a retrospective change that would be incredibly damaging for retirees who have been planning their retirement on the basis that they could take a cash sum free of tax) our verdict is that it would be unlikely."
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