Government accused of stealth tax

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The Government was yesterday accused of imposing its first "stealth tax" by slashing the rebate paid to pension schemes when people contract out of the state pension.

The move will see rebates falling from 5.3 per cent to 4.8 per cent and will affect around eight million people in final salary pension schemes, in the private and public sectors.

The rebate is split between scheme members and employers, meaning that staff will likely face higher National Insurance bills while their employers face increased costs to make up the lost funding.

Those who contract out of the State Second Pension pay a reduced rate of National Insurance Contributions (NICs). Employers providing contracted-out pension schemes also pay a lower rate of NICs for those employees who join their schemes. To create the new 4.8 per cent rate, employer rebates are falling from 3.7 per cent to 3.4 per cent and employee rebates from 1.6 per cent to 1.4 per cent.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: "This is a stealth tax on people saving into a pension, and a further squeeze on the employers trying to help them. Cutting the value of the rebate will raise the operating costs of final salary schemes, and is likely to spur more employers to close these pensions to staff. The Government should be supporting workplace pension schemes, not saddling them with extra costs."

News of the cut, which follows advice given by the Government Actuaries Department, was released yesterday. It came as the body set up to provide workplace pensions for employees of companies that do not offer them selected its first asset managers to steward their investments. The National Employment Savings Trust has hired UBS, State Street and Black Rock to manage five different funds.