Alistair Darling has announced he will restrict higher-rate tax relief on pension contributions for people with incomes over £150,000 from April 2011.
The Chancellor says, for incomes above the £150,000 level, the value of pensions tax relief will be tapered down until it is 20% for those on incomes over £180,000 - making it worth the same for each pound of contribution to pension entitlement as for a basic rate income tax payer.
The Government says it will consult on the implementation of this measure.
It adds that, in anticipation of this change, it was also introducing legislation to prevent individuals taking advantage of the pensions tax relief while it is still available to them at a higher rate, by making substantial additional pension contributions prior to the restriction taking effect.
The Government says those who have never earned in excess of £150,000 are unaffected, as are those who continue with their regular pattern of contributions.
Darling says: "It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1.5% of pension savers."
However, Friends Provident head of corporate pensions marketing Martin Palmer says any attack on pension tax relief sent the wrong message.
He warns: "This could be a dangerous trend if the Government does nothing to re-rate the earnings level each year.
"The administration of this tapering away of tax relief will increase complexity and the cost of running pension schemes for limited benefit to the Exchequer."
He adds: "Higher earners will ultimately receive basic rate tax relief on the contributions they pay in but when they come to take their pension they will no doubt have to pay the higher rate of tax. The UK needs to save more for its retirement rather than less as the level of engagement in pension planning in the UK is already pitifully low."
Aegon head of pensions development Rachel Vahey agrees: "This undermines the A-Day agreement which was designed to promote long-term pension saving, using the standard lifetime allowance to prevent abuse of the system by the rich.
"That major overhaul of the pensions tax rule was meant to last 30 years rather than three years. Pensions are for the long term so consistency is essential to give people confidence to plan for the future.
She added: "Reducing tax benefits may seem a relatively easy way of raising cash but today's changes send a message that goes wider than the people directly affected. We can't afford a vicious circle of less engagement with pensions leading to increased temptation for politicians to cut their value. Pensions are still a good deal but the more the Government alters the rules the less trust people will have in pension saving going forward."
The move follows speculation over the weekend that the chancellor would scrap higher-rate tax relief on pension contributions altogether - a move the industry branded as "entirely wrong" and "a direct attack on middle Britain".
ABI director general Stephen Haddrill said: "This would be an entirely wrong and short-sighted response to the huge challenges facing the Government, and a direct attack on the hard-working people of middle Britain, who are saving sensibly for their retirement."
He added: "Half of the UK's workforce are not saving enough for a comfortable retirement already. We need more people to save, not to punish those who are already doing so."
Hargreaves Lansdown said such a move would be an "unwise" policy - noting HRT relief was only worth around £2bn and less than 10% of the total tax relief granted on pensions.
It added such a move would mean occupational schemes would have to change the way they pay into pensions - and could be circumvented by salary sacrifice
Hargreaves Lansdown head of pensions research Tom McPhail explained: "UK pension provision is in a fragile state; withdrawing higher rate tax relief would be reckless, unfair and arguably unworkable.
"If the government chooses to go down this road it will leave a legacy as the administration that demolished incentives for people to save for their own retirement."
The National Association of Pension Funds agreed. In a statement, the trade body said: "This would be highly damaging at a time when government policy is rightly directed at increasing pension saving. Such a move would have a negative effect on employees and also employers operating defined benefit schemes."
It added: "For employees, such a move would only undermine consumer confidence in pensions, reduce the value of pensions and penalise those who taking responsibility for their retirement.
"For employers, it would have a negative impact on those operating DB schemes who are already facing significant funding pressures and open up a funding gap for all schemes prompting employers to review contribution rates and benefit levels. The likely consequence would be to prompt a further wave of closures and a general levelling down of provision."
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