The Liberal Democrats are to drop their policy of calling for the abolition of higher rate tax relief for pensions in favour of a £250,000 reduction in the lifetime allowance.
A policy paper prepared for the LibDem party conference proposes a new £1m lifetime allowance, while rejecting three other attacks on pension tax relief mooted in a consultation paper published last spring. That consultation considered cutting the annual limit on tax-relieved pension contributions from £40,000 to £30,000, reducing the tax-free lump sums that can be taken from pension pots – either to a lower proportion than 25 per cent of the total or by capping the cash amount and making employers and employees pay National Insurance Contributions on the money that employers contribute to employees’ pensions.
The party’s new policy paper says that ‘while the Liberal Democrats still recognise the merits, in principle, of moving to a single rate of relief, there are significant practical obstacles to such a proposal… therefore, we support limiting lifetime relief as a more effective way of restricting the pension tax relief given to the wealthiest’.
The new policy paper says ‘we propose to retain the existing £40,000 annual allowance, in order to protect individuals who may only make sporadic pension contributions during their working life due to irregular income patterns, such as entrepreneurs’.
Towers Watson senior consultant Jackie Holmes says: “Scrapping higher rate tax relief is much easier said than done. This is a policy with lots of noisy cheerleaders but there has always been less enthusiasm amongst those who would actually have to implement it.
“The realities of governing appear to have made the Liberal Democrats go cold on the idea and it’s not difficult to see why. To make this work, the Government would have to make millions of higher rate taxpayers pay tax on the money that their employers pay into pensions for them. Further calculations would be involved for public sector employees and others in defined benefit schemes, because it is the value of the pension promise that would need to be taxed, not the employer contribution.
“This is an example of politicians sensibly performing a u-turn when the road turned out to be less traversable than they had imagined. Hopefully the Liberal Democrats’ conversion means that we can get through at least the next two Budget cycles without the usual scaremongering about the imminent demise of higher rate tax relief.
“The last cut to the lifetime allowance has not even come in yet but another reduction is already being talked about. The lower this limit goes and the more times it is cut, the harder it will be for higher earners to plan for retirement. Unfortunately, it’s inevitable that aspects of the pensions tax system will remain unpredictable: politicians looking for revenue from the better off may find it easier to target their ability to save in pensions than their houses and other assets.
“The rule that the taxman uses to value defined benefit pensions means that a £50,000 annual pension is treated as being worth £1 million. Some higher earning public sector employees would therefore have to come out of the scheme or face a tax charge if the Liberal Democrats persuaded their coalition partners to adopt this policy.