On the go: Employers and staff might have to increase their contributions to defined benefit schemes if a rumoured cut to the 40 per cent relief for higher-rate taxpayers goes ahead, Aegon has warned.
According to The Times, Rishi Sunak, the new chancellor of the exchequer, plans to press ahead with a cut to pensions tax relief for high earners in the upcoming March Budget.
Under current rules, tax relief is paid on savers’ pension contributions at the highest rate of income tax they pay.
This system costs the Treasury almost £40bn a year in lost revenue, but cutting tax relief on pension contributions to 20 per cent, rather than the 40 per cent enjoyed by higher earners, could help raise £10bn a year.
Steven Cameron, pensions director at Aegon, noted that while in defined contribution schemes the impact of this cut could be a reduction on members’ future pension and may discourage some from saving through pensions, the implications for DB are far less clear.
He said: “Here, the individual is promised a certain pension at retirement. Their contributions are fixed, tax relief top-ups are paid to the scheme, and the employer pays whatever extra is needed to balance the funding of promised benefits across the membership.
“If the government cuts the top-ups for higher-rate taxpayers, either the members will have to pay more or the employer will have even greater balancing contributions.
“Neither will be welcomed, so this could be yet another prompt to close the few remaining ‘gold-plated’ DB pensions in the private sector.”
Mr Cameron noted that while few final salary schemes remain open in the private sector, they are common in the public sector.
“Any changes to the tax treatment of pensions would need to apply here too, to avoid divisive preferential treatment for public sector employees,” he said.
“So the government will face explaining significant contribution increases for public sector higher-rate taxpayers, or finding additional funds from public sector employers, which ultimately may have to be paid for by general taxpayers.
“This is one of many complexities that need to be fully thought through ahead of any reform of the tax treatment of pensions.”
