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Pension taxes for high earners may affect broader savings

Planned changes to the way the pensions of higher earners are taxed could have a far-reaching impact on retirement savings in general, the House of Lords Economic Affairs Committee has said.

The Committee has been scrutinising the Chancellor’s decision to reduce the tax relief on pension contributions for those earning more than £150,000 a year from 40 per cent down to 20 per cent as from 2011, and to introduce a 30 per cent tax charge on the contributions made by their employers to their pension funds.

The Treasury has said that the changes will involve probably no more than 290,000 taxpayers.

However, the Lords Committee argued in its report that, although small in number, those taxpayers will have a disproportionately significant influence over the pensions system, with many of them directors of companies holding responsibility for workplace pension strategies.

The Committee’s report said: “While the numbers directly affected may be relatively small, among them will be individuals who are influential in determining the pensions policy of many companies. The precedent may be seen as the thin end of the wedge in reducing relief more generally, so risking a reduction in pensions savings.”

Committee chairman, Lord Vallance added: “At a time when most people accept that we need to encourage greater pension saving, the proposed change may have a far wider effect.”

The Lords report urged the government to complete its consultation on the proposed measures well before they are implemented in 2011.