Basic rate tax reduction to hit Friends stakeholder contributions

Contributions into Friends Provident group stakeholder products are set to fall when the basic tax rate falls in April unless employers or staff pay more in.

The insurer’s stakeholder contracts collect contributions on a net basis rather than gross, which means less will go into members’ pension funds when the basic tax rate falls from 22 to 20 per cent at the start of the new fiscal year.

Under the 2007/08 tax rates members have to pay £78 to receive £100 in their pension with basic rate tax relief. Friends scheme members will have to pay in another £2 to maintain their pension contributions. Rival pension providers’ contracts allow them to simply increase net contributions to keep gross contributions stable. Friends has written to employers and intermediaries explaining that net contributions will need to be increased if benefits are to be maintained at current levels.

Skandia estimates that the Government is set to save somewhere in the order of £2.6bn a year on account of the lower grossing up of tax relief. The changes will hit 22m taxpayers, who will end up paying 2.5 per cent more in contributions or see their benefits reduce. Bob Perkins, product research manager at Origen says: “Most insurers will simply take £80 rather than £78, but Friends does it differently. Changes to tax rates could alsoraise an issue of whether employers are breaching contracts of employment if a certain agreed percentage of salary is not being paid in.”

Chris Bellers, pensions technical manager at Friends Provident says: “When we introduced our stakeholder suite of products back in 2000 the decision was made to take contributions on a net basis rather than a gross basis. If basic rate tax had gone up, our gross pension contributions would have increased. Other providers took the opposite track. We took the decision that this approach made the contract easier for consumers to understand. Whether that was a good decision is debatable.”