Proposals from the Treasury on pensions tax relief will be less damaging to workplace pensions than the previous government’s plans to restrict pensions tax relief, says the National Association of Pension Funds (NAPF).

The Treasury has today (27 July) issued nine documents for discussion and consultation relating to tax, with one relating to the restriction of pensions tax relief and the alternative approach outlined by the Government in the June Emergency Budget.

The alternative approach is to that adopted in the Finance Act 2010 (April), which was met with concerns from the pensions industry and employers, and the Government has reservations about it. It is feared that the current approach would have unwelcome consequences for pension saving, bring complexity to the tax system and damage UK business and competitiveness.

The Government is therefore considering an alternative approach which would involve the reform of existing allowances and see a significantly reduced annual allowance.

The NAPF said the discussion document is a step in the right direction with its proposals. “Many details still need to be resolved, but we are pleased the Government is taking our proposals on board,” said Joanne Segars, chief executive of the NAPF. “By looking to reduce the annual allowance, the Treasury is now facing the right way.
“It’s a simpler approach that will encourage higher earners to stay in their workplace pensions, so helping protect pensions saving for all staff.”

The paper discusses setting the annual allowance at £40,000, which Segars said “could be workable, but much depends on other variables that are yet to be confirmed”.

However, Segars said the Government appears to be moving ahead with including past service in the valuation of defined benefit (DB) pension rights, which is “disappointing”.

“At a stroke this will drag many people on modest earnings with ‘final salary’ pensions into the net.”

Lane Clark & Peacock’s (LCP) Mark Jackson, partner, added his disappointment into the mix. “The further detail in the discussion document will satisfy employers for a short time, but it’s disappointing to learn that confirmation that the annual allowance is the way forward will not now be until the end of September. The Treasury document recognises that employers have a great deal to do to manage the impact of the tax changes, but bearing in mind that changes to pension schemes normally need at least three months’ consultation with affected parties, plus planning beforehand, the window to April 2011 is getting very small.”

The consultation document closes on 27 August 2010.

Share Story: