Liberal Democrat proposals to scrap pension tax relief for higher-rate taxpayers have been condemned by the pensions industry.
The LibDems unveiled the proposal to scrap higher-rate tax relief on pensions this morning as part of a wide ranging set of reforms which would also see the capital gains tax allowance slashed from £8,800 to a mere £1000.
The party says by effectively scrapping both allowances it can abolish the existing 10p starting rate for income tax, taking more than two million people out of tax altogether.
It also says the reforms would enable it to lower the basic rate of income tax by 2p.
One small crumb of comfort for those on higher salaries is the party proposes to raise the threshold for the 40% upper rate of taxation to £50,000 a year.
Rachel Vahey, head of pensions development at Scottish Equitable, has accused the LibDems of failing to understand pensions saying the party does not seem to realise higher-rate taxpayers invariably consist of company bosses who would see no incentive to create occupational pension schemes for their employees if such a plan were to ever become reality.
Vahey says: “My concern is I have no idea of what they are planning to do with the money. It’s really taking money away from pensions at a time when it’s needed to maintain support for the industry.”
She adds: "The best pensions are set up through the workplace and if the tax relief is reduced, then company bosses will not have as much of an incentive to set up pension scheme in the first place.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, says he is also “not enthusiastic” about the proposals, arguing higher-rate tax relief is “a significant incentive for people to put money into savings”.
“In isolation, the removal of it would have a catastrophic effect on pension funding so if they were even to contemplate the move they would have to come up with a way to counteract it and still make saving into pensions an attractive proposition,” he adds.
John Lawson, head of pension policy at Standard Life, says: "It's an extremely flawed plan, the LibDems need to have a serious rethink about this proposal. You have to ask yourself, given there are about four million higher rate taxpayers in the country today - who have a higher propensity to vote than those on lower incomes - whether this sort of proposal would harm their election chances. I would say it would.
"Pensions under these proposals would almost become pointless," he adds.
Among other proposals annouced by the LibDems today is reform of how and when inheritance tax is charged so that it falls on accessions, as well as raising the threshold and cutting IHT rates.
Stamp Duty Land Tax reforms are also proposed with the Lib Dems saying the tax should be charged progressively and only charged at higher rates on the proportion of the property value above a threshold rather than the whole of the property value as is currently the case.
Liberal Democrat shadow chancellor, Dr Vince Cable, says the proposals demonstrate the party’s commitment to tackling inequality.
“The changes in income tax will make the tax system fairer for those on low and middle incomes. Specifically this will benefit the vast majority of pensioners, key public sector workers and young professionals."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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