THE GOVERNMENT has been warned not to make further cuts to the annual tax allowance because it would discourage people from saving into their pension pot.
The National Association of Pension Funds (NAPF) told chancellor George Osborne that changes to the pensions tax system would undermine public confidence in saving for retirement and could deter people from being auto-enrolled into a pension.
There is growing speculation that the chancellor is considering cutting the maximum amount of annual pension contribution that is exempt from tax, known as annual allowance.
Currently, the maximum amount that people can pay into a pension annually that is subject to tax relief is £50,000 but the NAPF believes this could cut to £40,000 or even £30,000 a year. The government reduced the annual allowance from £255,000 to £50,000 with effect from 6 April 2011.
In its submission ahead of the Autumn Statement, in which Osborne will outline plans for the economy, the NAPF said the government should leave pension tax alone.
“If the chancellor goes ahead, it’s not just the rich who will be affected, but also middle earners. Moderate earners paying into a final salary pension who have built up many years of service could be hit with significant, one-off tax bills as a result of modest promotions,” Joanne Segars [pictured], NAPF chief executive, said in a statement.
The NAPF also called on the chancellor to help pension funds deal with the damaging effects of quantitative easing, which it said has contributed to pension fund deficits hitting record levels, and called for an adjustment to discount rates based on gilt yields, or an alternative discount rate approach.
Quantitative easing has forced gilt prices up, reducing the yields that investors like pension funds make on them. The NAPF estimated earlier in the year that quantitative easing had increased deficits by at least £90bn over the last three years.
“The chancellor needs to acknowledge the damaging effects of QE for pension funds and the employers offering them. He must give pensions some respite by indicating that an adjustment to discount rates based on gilt yields is helpful. This could free up more cash for businesses to spend on investment and jobs, helping the wider economy,” Segars said.