Thursday 14 October 2010

Overdue pension change

There's so much stuff coming out of Whitehall these days that you almost wonder what they can possibly be saving up for next week's spending review. Today the government announced a series of reforms in personal pension rules which will, when they come into effect in April next year, save the Treasury an estimated £4 billion per year, or more than 20% of the annual cost of pension tax relief.

There's a lot to the reforms, but the most eye-catching and welcome change is a drastic reduction in the maximum annual pension contribution for which an individual can claim tax relief. Currently an eye-watering £255,000, this limit will be cut to £50,000. About time, too. The provision of tax incentives to encourage individuals to provide for their later years is all well and good, but allowing them tax relief on the accumulation of huge pension pots is nonsensical. The tax relief should allow the accumulation of a fund big enough to provide a "living pension"; beyond that, it makes no sense at all for ordinary taxpayers to be subsidising the better-off in building huge pension funds. If people want to save more, that's fine, but there's no reason for the taxpayer to subsidise it.

A related change will see the lifetime maximum for pension contributions lowered to £1.5 million from the current £1.8 billion, starting in 2012. This may be where things get interesting in the spending review next week. These limits apply to private sector pensions, but there is no similar limit in the public sector. Many senior public servants -- step forward, Bank of England Governor Mervyn King among many others -- have notional pension funds fare larger than these limits. Dollars to doughnuts, today's change will be used by the government to justify the imposition of a limit on public sector pensions as well.

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