Pensions tax raid would stop people saving for old age (2024)

• Institute for Fiscal Studies said cutting tax relief on pension contributions would be 'complex, unfair and inefficient'

By Huge Duncan Economics Correspondent

Published: 00:04, 6 February 2014 | Updated: 09:47, 7 February 2014

Plans to hammer the middle classes with a raid on their pensions were yesterday branded ‘unfair’ in a devastating analysis by Britain’s most respected tax watchdog.

The Institute for Fiscal Studies said cutting tax relief on pension contributions for millions of workers is frequently proposed by politicians hoping to raise cash to fund pet projects.

But it warned that such a move would be ‘complex, unfair and inefficient’ and put off prudent workers saving for retirement.

It also criticised moves to reduce the annual allowance and lifetime limits which restrict how much a worker can save each year, and in total, for a pension – something the current government has already done.

The findings, in the IFS Green Budget, will pile pressure on all three major parties to clarify their plans for taxing private pensions. Industry experts called for stability in the way pensions are taxed amid warnings that savers are ‘easily spooked’ by talk of change.

Pensions campaigner Dr Ros Altmann, a former Downing Street adviser, said: ‘It is about time we got a stable pension system so people know what they are doing.

‘But successive governments have kept on hitting pensions and we keep hearing stories about how they are going to hit pensions again. Either governments want people to save for their retirement or they don’t.’

Workers paying into a pension get the income tax already paid on that money back through pension tax relief. Those paying basic rate tax get 20 per cent back. Higher rate earners get 40 per cent and those earning over £150,000 get 45 per cent.

Those who have saved enough will then be taxed on their pension income drawn in retirement at 20 per cent, 40 per cent or 45 per cent. But fears are mounting that politicians could limit tax relief.

The Lib Dems proposed restricting it on all pension contributions to 20 per cent in their 2010 election manifesto.

Higher rate taxpayers – those earning over £41,450 – would see their relief halved, but could still face paying 40 per cent tax when they retire.

Labour last year said it would cut tax relief on contributions for anyone earning over £150,000 a year from 45 per cent to 20 per cent.

It is feared that it could be the thin end of the wedge and a new Labour government could reduce the £150,000 threshold over time to include middle income employees.

The IFS said such moves would raise less than anticipated and be deeply unfair.

Director Paul Johnson said: ‘It would impose a degree of double taxation on pension saving. It would also further disadvantage young savers relative to current pensions.’

The IFS dismissed suggestions that it is unfair that high earners get more tax relief, pointing out that they pay more tax on their incomes while in work and in many cases also in retirement.

Experts said now would be a reckless time for change given the success of auto-enrolment which requires employers to sign staff up to workplace pensions unless the employee opts out.

Tom McPhail, of wealth manager Hargreaves Lansdown, said: ‘The broad pensions tax structure should be sealed away from political interference until 2020 at the earliest.’