Pension firms warn Labour over tax attack on savings

Firms representing millions of savers have joined forces to warn Rachel Reeves about the damaging consequences of an assault on pension contributions.

The Chancellor of the Exchequer is widely believed to be considering a cut to income tax relief on retirement savings for higher-income taxpayers.

This could end up affecting nearly 9 million workers as more and more employees are forced to pay taxes at a rate of 40 percent in the coming years.

Pension firms including Standard Life have warned that this could discourage employees from setting aside enough money for their retirement.

Workers who put their pension savings into the system receive tax relief on those payments: 20 percent for basic-rate taxpayers and an additional 20 percent if they pay tax at the higher rate of 40 percent.

But there are fears that Labour could limit tax relief for those in the 40 per cent bracket as Reeves seeks to shore up public finances.

And some are also concerned about other possible pension reforms, which could include reductions in the lump sums that can be withdrawn tax-free or making pensions subject to inheritance tax.

Mike Ambery, director of retirement savings at Standard Life, said: “A flat rate of pension tax relief will increase the complexity of the pension system and have a lasting impact on people’s future retirement, so it is important that decisions are made with a long-term view rather than focusing on short-term tax challenges.”

Steven Cameron, pensions director at insurer Aegon, said: “While it may be tempting for the Chancellor of the Exchequer to increase tax revenue by reducing such incentives, doing so could have far-reaching adverse consequences if they discourage people from doing the right thing and saving for their own retirement rather than relying on the state.”

Lynda Whitney, senior partner at Aon, said: ‘Pensions are a long-term product where confidence in the structure is vital.

‘Changes for short-term budgetary reasons could erode that confidence, particularly if the Treasury makes what appear to be retrospective changes to pension taxation, retirement lump sums or pension inheritance rules.’

Steve Watson, director of policy and research at NatWest Cushon, said: “Any potential changes to the pensions equation must be part of a long-term vision. We have seen how superficial adjustments can lead to an unbalanced system.”

Tess Page, UK wealth strategy partner at Mercer, said: “We already know that people are not saving enough for their retirement.”

Jamie Fiveash, director of Smart UK, said: “Rumours about tax changes have the potential to lead us in the wrong direction.”