Treasury offers assurances on pension tax relief

Link: Prudential closes final salary pension scheme

What old age poverty campaigners have labelled a ‘tax perk for the rich’ came into question over the weekend from unnamed government sources – probably in or connected to the Department of Works & Pensions or a government think tank – who want to redistribute the cash to encourage the lower paid who traditionally make no pensions provision and whose low pay means they benefit least from tax relief.

But the Treasury acted immediately – on orders from chancellor Gordon Brown – to make it clear there is absolutely no risk of the tax relief being removed.

A Treasury spokesman said: ‘No such proposal is being considered by ministers, let alone agreed.’

Various reports have revealed a deep split within government over how to react to the pensions crisis, with some 60% of employers now reported to be refusing to allow new employees to join company pension schemes.

Ministers’ concerns are that the expectation of a further ‘stealth tax’ might frighten middle-high income earners to switch savings elsewhere if pensions cease to be ‘tax-efficient’.

Treasury sources did not, however, rule out some form of cap on contributions, perhaps in line with the stakeholders’ pension scheme.

The seriousness with which the crisis is viewed was shown by the comment from Iron and Steel Trade Confederation general secretary Michael Leahy, who said failure to act could be as damaging for Labour as the poll tax was to prime minister Margaret Thatcher.

But Paul Diggle, head of pensions and savings at the Inland Revenue is reported to have told the pensions industry that current tax incentives are unsustainable.

And there has been talk amongst some pensions experts of replacing tax relief altogether with a £1 for £2 incentive to make pension or protected savings contributions up to a specified limit, benefiting the lowest paid.

Meanwhile Liberal Democrat shadow chancellor Matthew Taylor said there was no need for tax rises simply to fill a ‘black hole’ in the national accounts caused by an economic slowdown.

He said such action would risk turning the downturn into a recession and would be an over-reaction to a short-term deficit.