Taxing Old Age: UK Pensions in Firing Line, Again
Pensions in Britain will be hit by further cuts to annual tax relief announced on Wednesday by Finance Minister George Osborne. Analysts told CNBC that the measures would not just affect Britain's high earners.
Triple-A Britain, treading a fine line with credit ratings agencies, announced cuts in spending and a reduction in tax breaks to further a course of austerity that has so far kept its credit rating at the highest grade possible.
Tax relief for pensions was one area that Osborne looked to when he updated his plan to tackle public sector net borrowing, which increased to 8.6 billion pounds for October compared to 5.9 billion pounds for the same time last year.
Savers are currently allowed to pay 50,000 pounds ($80,500) a year into a pension scheme in Britain without being taxed. Two years ago the figure was 250,00 pounds before Osborne opted for the change, and a further slice to 40,000 was detailed at Wednesday's speech.
Osborne said the treasury hoped to raise 1 billion pounds by cutting the tax relief on pensions, which also included reducing the lifetime allowance from 1.5 billion to 1.25 billion pounds.
"Aggressive action by successive governments to siphon cash from the nation's pension pots has shattered the public's faith in saving for retirement." Simon Walker, director general of the Institute of Directors, said in a statement before the announcement was made.
"Further attacks on the remaining reliefs will weaken the stability of pension funds and simply restate the message to pension savers that they might as well not bother."
(Read More: Osborne Tries to Sweeten Pill for Austerity Britain)
The U.K.'s tax office statistics show that in 2010/11 the treasury gave away 32.9 billion pounds in tax reliefs for people saving for a pension. According to financial services firm Standard Life cutting the taxable allowance down to 40,000 pounds could increase that by roughly 600 million pounds.
"We must remember that any change to the limit on tax efficient pension contributions only affects a small percentage of the population," Jamie Jenkins, head of workplace strategy at Standard Life told CNBC.
But it's not only the undermining of pension plans that is causing concern. Companies are having to deal with large pension deficits due the record low gilt yields that are reducing interest that pension funds can earn.
Accounting firm PWC says its index, which tracks the ability of FTSE 350 companies to support their collective pensions obligations, is almost 15 points lower than the level achieved in mid-2007.
"The Chancellor needs to acknowledge the damaging effects of (quantitative easing) QE for pension funds and the employers offering them. He must give pensions some respite by indicating that an adjustment to discount rates based on gilt yields is helpful. This could free up more cash for businesses to spend on investment and jobs, helping the wider economy," Joanne Segars, chief executive from trade body NAPF, said in statement.
(Read More: UK Prepares for Decisive Day as Downgrade Looms)
Modestly Paid Affected?
Pensions remains a hot issue in a country that is struggling to overcome its pile of debt. The U.K's Office for National Statistics has released data showing that in England's more affluent southeast, over half of the combined wealth held by the top 10 percent of households was private pension wealth. In the least wealthy half of households in the same area 43.3 percent had no private pension wealth at all.
Data like this may have urged George Osborne to act and upset high earners, but U.K. think tank Reform believes that hitting tax concessions such as pension tax relief offers poor value for money and provides little support for the people who need to save the most.
"[They] are unlikely to have a substantial effect on increasing the savings rate (most of those people affected will save for their retirement regardless). However, any changes to pension tax relief should be based on principle rather than political whim," a spokesperson for Reform told CNBC.com.
(Read More: UK Braces for Attack on Welfare State)
Tom Stevenson, investment director at Fidelity Worldwide Investment is not so sure that only high earners will be affected. The way in which final salary schemes are calculated means a reduction along these lines could actually impact people who don't consider themselves to be "fat cats", he said.
"It could, in fact, impact a much broader range of people, including relatively modestly paid public sector workers that are part of final salary schemes," he told CNBC.com.
"While pensions tax relief is a politically sensible target because it tends to favor higher earners disproportionately, the government should accept that a stable and predictable pensions regime is essential if we are to defuse the ticking retirement time bomb."