HM Treasury has underestimated the implementation costs for the new higher earners' pensions tax regime by a factor of seven, claims Standard Life.

Analysis by the insurance group suggests that the one-off compliance cost should be closer to a figure of £2.5bn, rather than the government's estimated £345m bill.

The 'true' cost, Standard Life said, is made up of £52.5m in employer costs, £1.38bn in employee costs, £525.3m in scheme and provider costs, and £75m in HMRC costs.

Ongoing annual compliance costs are also underestimated in the impact assessment, said Standard Life, which placed the total at £435m rather than HM Treasury's £130m.
Major costs, such as individual advice and the extra cost to providers of building alternative products, were omitted by HM Treasury, Standard Life said.

Changes to the annual allowance is necessary, said Standard Life, and the group estimates that the implementation and annual compliance costs would be £459m for implementation, saving over £2bn, and £118m for ongoing annual compliance.

"This is inefficiency gone mad - pension savers, their employers and their pension schemes will have to spend £2.5bn so that HM Treasury can collect £3.6bn of tax," commented John Lawson, head of pensions policy at Standard Life. "Given the burdens faced by people as a result of the recession, adding further unnecessary bureaucratic cost adds insult to injury. The problem stems from the mind-boggling complexity of these rules. A simple reduction to the existing annual allowance would cost only a fraction of this to implement."

In its own impact assessment, Standard Life details how to bring costs down to a total of £459.1m, reducing the different elements to £75m (employer costs), £300m (employee costs), £69.1m (scheme and provider costs) and £15m (HMRC costs).

Meanwhile, PricewaterhouseCoopers' (PwC) forthcoming pension survey shows that the higher earners pension tax will jeopardise pensions provision for all employees.
Seventy per cent of employers in a survey by PwC said the reduction in pension tax relief for higher earners will result in lower pensions for the wider UK workforce.

"Business leaders are telling us that they have lost trust in the durability of the tax regime governing workplace pensions, and are worried about future exposure to additional costs for employers and employees if governments continue to chip away at tax relief," explained Marc Hommel, pensions partner at PwC LLP. "There is a new energy among employers to explore different ways to spend their reward budget to motivate their people and help them make long-term savings. Further removal of pension tax relief will contribute further to demotivating employers to provide quality workplace pensions."

The survey, of 179 employers including 38 FTSE 100 companies, also showed that 74 per cent are concerned about the administrative and compliance load that is posed by the tax regime.

One alternative, 74 per cent of respondents said, would be for the government to raise similar sums by reducing the annual allowance that limits the amount an employee can save each year.

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