Pension funds warn Labour over savings tax fraud

Firms representing millions of savers have gathered to warn Rachel Reeves of the damaging effects of a raid on pension contributions.

It is widely believed that the Minister of Finance is considering reducing the income tax deduction on pension savings for taxpayers in the highest tax bracket.

This could ultimately affect nearly 9 million workers, as more and more employees will have to pay 40 percent tax in the coming years.

Pension funds including Standard Life warned that this could prevent employees from putting aside enough money for their retirement.

Employees who save for a pension will 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.

However, there are fears that Labour will cut tax cuts for people in the 40 percent bracket as Reeves moves to shore up the public finances.

Some are also concerned about other possible pension reforms, such as a reduction in lump-sum tax-free payments or taxing pensions with inheritance tax.

Mike Ambery, director of pension savings at Standard Life, said: ‘A fixed rate of pension tax relief adds complexity to the pension system and has a lasting impact on people’s future retirement. It is therefore important that decisions are made with a view to the long term rather than just the short-term financial challenges.’

Steven Cameron, pensions director at insurer Aegon, said: “While it may be tempting for the Chancellor to increase tax revenues by reducing such incentives, this could have far-reaching negative consequences if it discourages 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 essential.

‘Changes for short-term budgetary reasons could undermine that confidence, especially if the Treasury implements changes that resemble retrospective changes to the pension tax on lump sum payments or the rules for the inheritance of pensions.’

Steve Watson, director of policy and research at NatWest Cushon, said: ‘Any potential change to the pension equation needs to be part of a long-term vision. We have seen how tinkering around the edges 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 retirement.’

Jamie Fiveash, managing director of Smart UK, said: “The rumours about tax changes could take us in the wrong direction.”