Liberal Democrats and pension tax relief

With the Liberal Democrats continuing to flirt with Conservatives and Labour to form a coalition government, investors will be thinking carefully about their manifesto promises, particularly when it comes to higher rate income tax relief on pension contributions.

One of their tax proposals is to restrict pension tax relief to the basic rate. On page 100 of their manifesto on finances, they project a tax saving of nearly £5.5bn, referring to this as a tax relief that benefits the wealthiest.

Before the election, Nick Clegg was quoted as saying that they would “unwaveringly pursue” their series of tax reforms in the event of a hung parliament, something that materialised at the end of last week. It is impossible to know at this stage how far these tax reforms are being pushed during negotiations with both parties, and what will happen in practice should either coalition emerge.

For higher rate taxpayers who were planning to make pension contributions during the 2010/11 tax year anyway, it would seem like sensible practice to make them sooner rather than later, before pension tax relief suffers another attack.

Thinking longer term, pensions are facing increasing pressure in terms of their tax benefits and we believe the subject of individual retirement planning is something that a future government will need to address by establishing an independent committee to manage pension policy.

This becomes even more important in light of the widening gap between generous public sector pensions, which have to date remained off the pension hit list, and increasingly under pressure private sector pension provision.