The Chartered Institute of Taxation (CIOT) is calling for the planned restriction on pensions relief for 50% taxpayers to be abandoned.

I agree. While it may make some people, especially vindictive left-wingers, feel gooey inside to "get one over" the highest earners, there will be terrible costs associated with this short term, mean-spirited proposal.

Firstly, employers now have to grapple with fiendish levels of complexity just to work out what they're supposed to do. The government thought they were being terribly clever by withdrawing the personal allowance and introducing a 50% rate for highest earners, and must have applauded their ingenuity for keeping one step ahead of possible pensions-related tax avoidance schemes. Yet according to the CIOT, the government believes this will cost businesses £1bn in setup costs in the first year.

Even worse, senior managers at companies may decide to give up on pensions altogether, now that it no longer makes sense for them to be in the company's plan. This may be a further incentive to 'level down', or move to the government's stingy NEST proposals instead of existing (probably more generous) plans. NEST, unlike earlier government promises, now seems set to have high charges to accompany its tiny level of contributions. You would struggle to design a worse scheme to avert poverty in retirement.

Worst of all, there's simply no need for any change. The government introduced sweeping changes to pensions a few years back on what was called A Day. Among other changes, this introduced a lifetime limit, or the maximum amount that any individual can have within their personal pension pot. Amounts above this are subject to swingeing levels of tax. The lifetime limit acts as a natural ceiling on pensions-related tax avoidance. Once exceeded for an individual, the scheme simply won't work any more.

Sure, this would mean some individuals doing rather better than under relief-restriction. But given that the hidden costs of relief-restriction will land on ordinary workers with a vengeance, we must accept this as a price worth paying. Can we hope that the Conservatives, if they win, will take this up as part of a simplifying agenda?

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Filed under: Politics, Taxation with tags a day, ciot, conservatives, lifetime limit, pensions, tax avoidance