Concerns have been raised that attempts to restrict higher rate tax relief on pensions could “kill off” remaining DB schemes in the private sector, and create further funding issues for public sector pensions.
There have been suggestions that the new chancellor Rishi Sunak may introduce a single flat rate of tax relief in his forthcoming budget. This Budget was initially scheduled for March 11th, but may now be delayed.
Ahead of any decision on this issue, many in the industry are warning that changes could have a negative impact on savings rates, as well as causing problems for the funding of DB schemes.
Aegon pensions director Steven Cameron says: “In defined contribution schemes, what people get back is based on their contributions, so a lower tax relief top up would reduce their future pension and may discourage some from saving through pensions.
“The implications for defined benefit pensions are far less clear. Here, the individual is promised a certain pension at retirement. Their contributions are fixed, tax relief top ups are paid to the scheme and the employer pays whatever extra is needed to balance the funding of promised benefits across the membership.
“If the Government cuts the top ups for higher rate taxpayers, either the members will have to pay more or the employer will have even greater balancing contributions. Neither will be welcomed so this could be yet another prompt to close the few remaining ‘gold plated’ defined benefit pensions in the private sector.”
He adds: “While there are few remaining in the private sector defined benefit schemes remain common in the public sector.
“Any changes to tax treatment of pensions would need to apply here too to avoid divisive preferential treatment for public sector employees. So the government will face explaining significant contribution increases for public sector higher rate tax payers, or finding additional funds from public sector employers which ultimately may have to be paid for by general taxpayers.
“This is one of many complexities that need to be fully thought through ahead of any reform of the tax treatment of pensions.”