Pension plan could hit savings

Retirement saving could be "damaged" by government plans to reduce pension tax relief for high earners, an industry body has warned.

The Association of British Insurers (ABI) said that a move to cut tax relief on pension contributions for people earning more than £150,000 could hit pensions savings levels and damage public trust and confidence in the system.

In the latest Budget, Chancellor Alistair Darling announced that from April 2011 the tax relief would be gradually tapered from 40% to 20%.

The ABI fears the move would make pensions more complicated to work out, going against the 'A-Day' measures that were introduced in 2006 to simplify the pensions tax regime.

It is concerned the Government is breaching a principle under which people who saved for their retirement got tax relief, regardless of the fact that the measures are only expected to affect only a small number of high earners.

The warning came ahead of the the ABI's director of life and savings, Maggie Craig, giving evidence to the House of Lords Economic Affairs Finance Bill Sub-Committee.

She said: "The Government and the main opposition parties must not undermine the principle of tax relief on pension savings any further by continuing to remove tax relief, either now or in the future.

"To do so would seriously damage public trust and confidence in the UK's pension system. That would mean less saving overall, and the prospect of a massively increased public bill for looking after people in retirement."

The National Association of Pension Funds also warned that the change could undermine company pension schemes.

Joanne Segars, chief executive of the NAPF, who is also appearing before the committee, said: "There is a risk that the proposed changes to pensions tax relief could destabilise workplace pensions at a time when they are already under pressure.

"If senior executives can no longer fully benefit from pension saving, they may disengage from workplace pensions and be less inclined to provide high value pensions for those on average incomes.

"The changes also breach the long established principle of tax-exempt pensions contributions and the policy recently introduced under this Government of pensions simplification."

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