The pensions industry is unanimous in its support of
a £50,000 annual cap on pension contributions in place of the tortuously
complex pension tax that is due to arrive in April of next year.

The new government has an opportunity in the
emergency budget to adopt this £50,000 cap in place of the pension tax drawn up
by Labour. This cap will raise approximately the same amount for the Treasury
as the pension tax according to calculations by Legal and General’s Pensions
Strategy Director, Adrian Boulding. It will also serve to limit the tax relief
available to high earners.

Unlike the pension tax, a
contribution cap will not cripple the private pension system by introducing a
new maze of taxation. With the cap in place the current government then has
some time to look at the design of the pension system as a whole (including the
issue of tax relief) in a considered manner. Too much pension policy has
already been written in a haphazard and impulsive fashion.

Tom McPhail, Head of
Pensions Research: “The beast is dead but the tentacles of the former
Labour government are still reaching for the private pension system in the form
of a monstrously complicated pension tax. Capping pension contributions at £50,000
is a much simpler way to achieve the same goal that has the support of the
whole pensions industry. We conducted an informal survey of the pensions
industry, including trade bodies, pensions lawyers, actuaries, fund managers
and IFAs. We asked them which was the more appropriate way to restrict the tax
relief of high earners; through Labour’s pension tax, or through a cap on
pension contributions. They unanimously opted for the contribution cap.”

The pensions tax will be
applied to those earning in excess of £130,000, but it also threatens the
workplace pension savings of people further down the income scale. Over three
quarters (77 percent) of employers surveyed by PricewaterhouseCoopers in June
2009 said that the announcement of the new pension tax reduced their motivation
to provide workplace pensions.

The incoming pension tax is
a pension policy driven by the desperate financial situation the previous
government found themselves in. We would like to see pension policy driven by a
desire to improve our pension system. So far the suggestions of our new
coalition government have been encouraging in this respect. They can add to
their credentials as progressive reformers by scrapping Labour’s pension tax
and introducing the contribution cap as an interim measure while they calmly
consider the options for building a better pension system.

10 June 2010

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