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Pensions could suffer if entrepreneurs shy from occupational schemes

Plans by the government to cut pension tax relief for high earners could have an adverse effect on workplace pension schemes, it has been warned.

Pension advisers have suggested that business owners may turn their backs on occupational schemes once the tax breaks on savings are reduced; and that could have consequences for employee pensions.

The fear is that, deprived of the support and interest of business owners, staff pension schemes will no longer play a central role in the running of the business.

The impact could be at its greatest in smaller firms where owners and directors share a scheme with their employees.

Following the government’s decision to cut the tax relief on pension contributions of those earning more than £150,000 a year, higher income entrepreneurs may be tempted to make alternative plans for their retirement funds.

With pensions less attractive, business owners may turn in increasing numbers to property and tax-efficient investment opportunities such as venture capital trusts.

Under planned changes to the pensions tax system, those on more than £150,000 a year could see the 40 per cent relief on pension contributions they currently enjoy tapered to 20 per cent. The move is intended to correct a situation in which 55 per cent of pensions tax relief goes to 2.5 million higher earners and 45 per cent to 13 million basic rate taxpayers.

However, pensions advisers say that the measure could mean that business owners will be less inclined to develop and nurture occupational schemes if their own money is invested elsewhere.

Insurers Legal and General have criticised recent calls from pensions campaigners for a 30 per cent cap on tax relief for middle-income earners in addition to the cut for higher earners.

Adam Boulting, L&G’s head of pensions, said that reducing the tax incentives to save would hit pensions across the board and would undermine retirement saving in general.