Britain's 'fat cat' pension tax may hurt middle earners

LONDON Wed Dec 5, 2012 5:07pm GMT

LONDON Dec 5 (Reuters) - British government plans to raid the pension pots of the wealthy as part of efforts to cut the country's deficit will also affect middle-income earners and may discourage workers from taking part in pension schemes.

The amount workers can put in their pension pot before it gets taxed has been reduced to 40,000 pounds ($64,400) a year from 50,000, and the total a worker can accumulate tax-free throughout their lifetime now stands at 1.25 million pounds.

The move will raise 1 billion pounds towards cutting the country's deficit, finance minister George Osborne said on Wednesday.

"This will reduce the cost of tax relief to the public purse by an extra 1 billion pounds a year by 2016-17," Osborne said in his half-yearly budget statement to parliament.

Osborne said the move would only impact the very largest pension pots, but pension consultants disagreed, warning it could further erode confidence in pension schemes and undermine government efforts to get more people saving for their retirement.

"Osborne claims he is taking a carrot away from the rich, but he is also beating many middle class savers with a stick," Joanne Segars, chief executive of the National Association of Pension Funds, said in a statement.

Because of the way that pensions under "defined benefit" pension schemes - which promise staff a pension based on their final salaries - are valued, many middle-earning members could be penalised.

A modest promotion after years of built-up service and contributions to a pension scheme could result in one-off tax bill for moderate earners.

Public sector workers may decide to retire early to avoid their retirement funds being taxed, city law firm Berwin Leighton Paisner said in a statement.

"If there are doubts over the future tax treatment of pensions, people at all income levels might be less willing to save into pensions vehicles," Paul Sweeting, European head of strategy at J.P. Morgan Asset Management, said.

The move comes 18 months after the UK government cut the amount workers can pay tax-free into their pension from 255,000 pounds ($410,500) to 50,000 pounds in April 2011, making thousands of workers liable for a tax charge on their pensions.

On a positive note for workers, the government will allow retirees with so-called "drawdown plans" to take an extra 20 percent of income from their pensions pots.

A drawdown plan allows people to keep their pension invested while taking an income to support them in retirement.

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