Pension funds attack Darling's pension tax plans

The extra tax bills could be substantial

The government has been told its plans to tax the pension contributions of high earners will do "enormous harm" to company pension provision.

The National Association of Pension Funds (NAPF) says the government's plans should be abandoned.

It says they could affect many more people than just those earning over £130,000 a year.

It also warns the proposals will prompt many more companies to close their pension schemes to current members.

"Senior executives, who have responsibility for company pension provision [will] opt out of their company provision due to the new tax regime, with the result that they become less engaged with the benefits of offering a good pension," the NAPF said.

Tax rises

The NAPF's comments came in a response to a formal consultation on the new pension tax plans, which are due to come into effect in April 2011.

The proposals are likely to affect many people earning far less than the target group, especially due to the arbitrary and random nature of the rules National Association of Pension Funds

Under the plans, about 300,000 people earning more than £130,000 a year will not only have the normal tax relief on their own pension contributions reduced, they will - for the first time - also be taxed on the value of the contributions made by their employers.

The government has estimated that these measures will raise £3.6bn a year.

That is on top of the £3.9bn extra tax it hopes to raise from this April, by gradually removing the normal income tax allowance for those earning over £100,000 and by taxing people at 50% on their earnings over £150,000.

In total, all these measures are estimated by the Treasury to eventually bring in an extra £7.5bn tax by 2012-13.

Calculations for the BBC have estimated that the changes will present some individuals with extra tax bills of about £20,000 a year.

Complexity

The NAPF says that the 2011 pension tax changes are misguided because:

• they will undermine people's certainty that it pays to save in a pension

• they are far too complex, probably costing 10 times the government's estimate for implementation

• they will bring in far less tax than expected - between £900m and £1.5bn a year - because many of those affected will simply stop saving in pension schemes

• and they will weaken the interest of top company executives in running a pension scheme for their staff.

"The 2009 budget proposals on pensions taxation threaten to apply enormous cost and complexity on pensions and also to undermine the UK's established approach to pensions taxation," the NAPF said.

"Our research shows that the proposals are likely to affect many people earning far less than the target group, especially due to the arbitrary and random nature of the rules."

Alternative

The NAPF argues that many more people will be caught by the changes than the government predicts.

That is because one-off income from promotions, bonuses, relocation packages and redundancy payments could push them over the £130,000 threshold.

This might well affect people whose normal earnings lie between £40,000 a year and £80,000 a year the NAPF argues.

Instead, the NAPF says the government should use a much simpler method to curtail the amount of tax relief it gives to high earners who save for their pensions.

It recommends cutting the value of the annual pension allowance of £245,000 a year.

This is the maximum amount by which someone's pension pot can increase in value each year before further increases are taxed.

The NAPF says this maximum should be reduced to between £45,000 and £60,000 a year which would still allow most individuals to build up a substantial pension in the course of their lifetime.