15th December 2009

AEGON - pre-budget report

The Government had already warned, ahead of the today's Pre-Budget Report, that those with the widest shoulders would carry the burden of helping get the UK back into the black. And true enough, the pensions rumour mill was proven right when changes were yet again announced to pensions tax relief for the highest earners.

The Pre-Budget Report has widened the net for those caught by the new pensions tax relief rules - both the permanent changes after April 2011 and the temporary anti-forestalling legislation already in place. With immediate effect, those who have an income of over £130,000 may find their pensions tax relief restricted.

This widens the net considerably for those affected by the new pensions tax relief rules, and confirms the industry's fears that the original changes announced in April 2009 would prove to be the thin end of the wedge. Those who receive generous employer contributions - including those who are relatively older and members of defined benefit pension schemes - stand to be most likely to be caught.

We all know the Government faces tough financial decisions. But it's imperative we develop a solid basis of retirement provision in the UK. And bringing in more people into the new rules attacks the very heart of this aim.

To make continual changes to pensions tax relief causes more pensions uncertainty and is wrong for savings. Politicians must oppose these further 'salami-slicing' tactics, otherwise there's a serious risk people won't believe any assurances that pensions are safe in their hands.

Other changes include increasing the national insurance (NI) rates by an additional 0.5% on top of measures announced earlier this year, meaning an extra 1% on NI from April 2011. This will hit all earners hard, although the Government has announced some protection for those who earn less than £20,000. But this change may increase the attractiveness of pensions salary sacrifice.

Finally, the Government is making changes to reduce the cost of public sector pensions to the taxpayer. The private sector has already shown those funding defined benefit schemes feel the need to contain costs. The Government has announced a cut of £1bn in public-sector pension contributions, and is expecting those who earn more than £100,000 to carry more of the burden by increasing their contributions.

But this Pre-Budget Report will be remembered for the further tinkering to pensions tax relief. This uncertainty is destabilising public confidence in pensions at a time when people need to be assured that if they make long-term savings plans, the Government will uphold their side of the bargain to keep to long-term pensions rules.

Rachel Vahey