Osborne urged to rethink pensions

Stripping higher-rate tax relief on the pensions of high and middle-income savers will "catastrophically undermine" trust in a system already in crisis, a group of industry experts and businesses leaders has warned.

Proposals being considered by George Osborne to axe tax breaks will see thousands of pounds vanish from the pension pots of up to four million people by the time they retire, according to the 21 business organisations, pension companies and retirement advisors.

In a letter to the Chancellor seen by the Times, the signatories, which include the Director-General of the Association of British Insurers and the head of the Institute of Directors, claim that even moderate earners could suffer a £50,000 hit to their pension funds if plans to cut tax relief for people who pay the 40 and 50% rate of income tax are enforced.

The warnings come as Mr Osborne faces growing pressure from Nick Clegg and his Liberal Democrat party to accelerate the rate at which the income tax threshold is raised to £10,000.

In their letter to Mr Osborne, the signatories also warn that any attempt to cut the amount that can be taken out of a pension pot tax-free when someone reaches 55 will be just as damaging.

Under the present rules, 25 per cent of a pension can be taken free of tax, meaning higher earners can take significant sums.

Lowering the £50,000 annual pension contribution limit - the maximum anyone can save per year while benefiting from tax relief - would also "send a message of no confidence to prospective pension investors," according to the leaders.

The money-saving move is another option open to Mr Osborne as he prepares his Budget.

The Chancellor is warned in the letter: "The UK's pension system is in a fragile state and with the crucial auto-enrolment reforms only a few months away, we urge you to resist any suggestions to restrict or withdraw tax breaks available to pension investors...Some in the Government are known to favour a cut in tax relief on pension contributions to the basic rate of income tax. As the previous government found to its cost, any attempt to divorce tax relief from income tax rates will only result in an overly complex set of rules."

It continued: "There have also been suggestions that the Government could cut the tax-free lump sum...but this would catastrophically undermine investors' trust in the Government not to renege on past promises."

Meanwhile, Britain's largest pension body also signalled its opposition to the proposals.

In a letter to The Daily Telegraph the National Association of Pension Funds (NAPF) said retirement pots should not be used as a "cash cow" to plug the public deficit.

The industry body accused the Chancellor of "tinkering" with pensions after years of "colossal upheaval" which has left confidence at "an all-time low."

It instead called on the Government to provide stability "so that people can plan and save with confidence."

NAPF chief executive Joanne Segars said: "It is tempting to think of 'higher earners' as a handful of undeserving fat cats, but the reality is more than four million people fall into that band.

"Our message ahead of the Budget is clear. There should be no further changes to the pension tax system.

"The Government should be trying to encourage saving, not putting people off. Treating pensions like a cash cow for short-term problems will create far bigger ones in the year ahead."

PA