Pensions raid will hit 340,000 high earners: Public sector fat cats among those targeted in the 1bn tax grab Pension tax-breaks to be cut to from 50,000 to 40,000 a year to raise 1bnChancellor insists wealthy must shoulder more of Britain's debt burdenTax-free allowance for pensions cut from 1.5m to 1.25m over a lifetimeExperts say cuts will not just hit fat cats and will discourage savers
But basic state pension is to rise by 2.5% next year to 110.15 a weekCritics say that it still leaves one in five pensioners in poverty
01:55 GMT, 6 December 2012
A 1billion raid on pensions will hit tens of thousands of middle and high-income earners, experts warned last night.
George Osborne yesterday announced he was cutting the tax-free amount an individual can put into their pension each year from 50,000 to 40,000.
It comes just a year after the annual limit was cut from 255,000.
Autumn statement: Chancellor George Osborne delivers his Autumn budget in the Commons and cut the tax relief for rich pensioners
The tax-free cap on lifetime pension
pots will also be reduced from 1.5million to 1.25million. The
Chancellor suggested the changes would largely affect only those at the
very top of the income scale.
But experts warned that many middle income earners could be affected if they are in final salary pension schemes.
However the main impact will be on those earning higher incomes, particularly in the public sector.
Sources suggested the change could
affect the top five per cent of public sector earners – including senior
civil servants, top doctors, leading police officers and head teachers.
Off to work: George Osborne and Danny Alexander leave the Chancellor's home on Autumn Statement day – and are set to hit Britain's richest
The Treasury said 160,000 a year
would be caught by the decision to cap annual tax relief at 40,000.
Some 340,000 workers will be affected by the lifetime allowance to 1.25
million. The pensions raid was drawn up as an alternative to the Lib
Dems’ mansion tax on homes worth more than 2million.
Mr Osborne said: ‘I know these tax
measures will not be welcomed by all – ways to reduce the deficit never
are. But we must show we’re all in this together.’
Joanne Segars, chief executive of the
National Association of Pension Funds, said many on middle incomes
could be hit with tax bills running into thousands of pounds if they got
a significant promotion.
She added: ‘The Chancellor is wrong to say that the changes will only affect those at the top of the wage tree.
Complaint: George Osborne and Danny Alexander leave the Treasury building on Whitehall yesterday but their decision to cut tax benefits for pensions have been panned by some
‘Osborne claims he is taking a carrot
away from the rich, but he is also beating many middle class savers
with a stick. Middle managers in the public and private sectors will get
caught in the net.
‘People in a final salary pension who
have worked loyally for the same employer for years and then get a pay
rise, or a promotion, could end up with a tax bill of several thousand
The self-employed and those nearing
retirement desperately trying to ‘catch up’ by boosting their pension
are also at risk. ‘What we desperately need is stability, so that people
can trust the pensions system and get on with saving for their old age,
instead of being treated like a cashpoint when things go wrong,’ she
Doing the maths: George Osborne on his visit to HM Revenue & Customs ahead of his mini-budget
But Ros Altmann, director-general of
Saga, said it was reasonable to trim the pension tax allowances of the
better-off. ‘It is understandable that the Chancellor has chosen to
limit the amount spent on top earners’ pensions tax relief,’ she said.
‘Tax relief is meant to be an
incentive to help people save for retirement, but it is hugely expensive
and it provides the most incentive to the people who need it least. The
highest earners get the highest incentives.’ Mr Osborne said the
average pension saver put in 6,000 a year, with just one per cent
putting away more than 40,000.
An individual saving for a defined
contribution scheme in the private sector would have to be earning well
over 200,000 to be affected.
WHY SHOULD NEST EGGS ALWAYS BE FAIR GAME JAMES CONEY'S ANALYSIS
Successful small business owners, workers with generous final salary schemes and the very wealthiest will be hit by the raid on pensions.
They will either be caught out by a lower cap on how much tax relief they can get on their pension contributions, or by a limit on the amount they can save up in a retirement fund.
Yesterday, George Osborne announced the annual tax allowance for pension contributions will be cut from 50,000 to 40,000 from 2014. The lifetime limit will be lowered from 1.5million to 1.25million. For the vast majority, paying these sorts of sums into a pension pot is unimaginable.
A 30-year-old, getting healthy annual pay rises and benefiting from a good return on his or her investment, would have to pay in 40p of every 1 earned every year for 35 years to get close to the 1.25million limit, according to insurers Standard Life.
Even someone in a very generous final salary scheme, with 40 years’ continuous service, who retired on 97,500 a year, would only just bust the cap.
The Government estimates that just 30,000 people would have more than 1.25million in their pension pots in 2014.
But around 330,000 of current working age could be affected in the future. These are all likely to be senior staff in companies or the public sector, with good final salary schemes to which they have contributed for years.
It is the annual allowance which will catch out more workers. Typically, small business owners don’t pay into a pension during their working years, instead preferring to make a large lump sum when they sell their company.
Head teachers, police chiefs, senior nurses, middle-ranking civil servants and private sector managers on around 50,000, who are in final salary schemes and get a 10 per cent pay rise could also bust the cap and face a tax charge on the excess.
The raid on pensions may be morally acceptable but the Chancellor must, once and for all, make up his mind how he wants to treat tax relief on pensions so workers know what to expect in retirement.
The message that this Government keeps reinforcing is that savers’ nest eggs are fair game when it comes to getting the economy back on track.
VIDEO: Catch up with the important aspects of the Chancellor's Autumn Statement here
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