Plans for pension tax relief cuts are made in the dark
Savers face drastic cuts to the amount they can put into their pension, but the decision is based on incomplete data, Telegraph Money can disclose.
Plans are afoot for the Chancellor to cut pension saving incentives in the Budget (see above). A key battleground is the £1.03m lifetime allowance, the maximum sum you can hold in a pension without triggering a tax charge of up to 55pc. Experts expect a reduction in the lifetime allowance or changes to the way it is assessed, which would hit final salary pension holders hardest.
At the moment, breaching the lifetime allowance is a threat if your final salary pension, with no separate lump sum, is on course to give you £51,500 a year or more. But if the Chancellor tweaks the way these pensions are valued, the lifetime limit could hit those who retire on £34,333 a year, or even £25,750.
Despite the significance of such a change, Freedom of Information requests to departments in charge of providing data underpinning the decision show that neither the Treasury nor HMRC could say how much tax relief was paid to savers in each of the two main types of pension: defined contribution and final salary, also known as defined benefit.
Jon Greer of Quilter, the wealth manager that lodged the requests, said: “It is impossible to make considered changes to pension taxation without better data and knowledge on where the money is spent. The impact of tinkering with allowances is consistently underestimated by the Government. Is this a reflection of the data on which policy is made?”
The Treasury said in its response to the information requests that it “does not hold [that] information” and suggested that HMRC might. But the tax office said it “does not hold all of the information required to determine the proportion of tax relief received by defined contribution and defined benefit schemes” because employers were not required to provide it with the details for “net pay” arrangements, the most common type of pension set-up.
HMRC publishes an estimate that is the source of the often-cited government figure of £39bn for the overall cost of pension tax relief. But the taxman said this figure could not be split by scheme type. Currently defined benefit pensions are favourably treated when it comes to tax relief because the calculation used to determine their value is based on outdated figures.