Changes deny private pensions £4.75bn

By JAMES SALMON FOR THE DAILY MAIL
Updated:

 

Private sector workers will take a £4.75bn hit to their pensions to pay for the economic recovery - while public sector workers will escape cuts.

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Aparthied: Private sector pensions will not get tax relief at 50%.

In further evidence of a pensions apartheid, public sector workers have avoided a raid on their gold-plated schemes.

They will simply have a limit placed on contributions to stop them building up huge pots so quickly - saving the public purse around £1bn a year.

By contrast, the Treasury will make several times this amount through sweeping reforms to strip tax breaks from top earners at private firms.

Alistair Darling wants those who benefited the most from the economic good times to pay extra to help the recovery.

But critics believe this tough stance is being directed only at the private sector, with civil servants escaping.

Tom McPhail, head of pensions research at advisers Hargreaves Lansdown, said: 'There seems to be a degree of double standards going on here.

'Mr Darling is bending over backwards to preserve the pension rights of public sector workers while going out of his way to impose punitive tax charges on another sector of the economy.'

Earlier this month the National Audit Office reported that the annual cost of goldplated public sector schemes was £19.4bn, with the public footing £14.9bn of this - £516 for every UK taxpayer.

Reforms outlined in the Budget on Wednesday revealed a cap to be placed on taxpayer contributions to schemes for NHS staff, teachers, the Civil Service and local government.

Once the liability reaches a certain level, employees will be expected to contribute a larger chunk of their salary. The Treasury says this will save the public purse £1bn a year from 2012.

However, it will save far more from wholesale changes to the pensions contributions of top earners in the private sector, beginning in April.

Normally taxpayers get tax relief on pensions contributions at the same level as their highest rate of tax.

So, if you are a basic rate taxpayer you get 20% tax relief on any money you pay in to a pension - meaning an £800 contribution is worth £1,000.

But despite having to pay a new 50p tax rate from April, higher earners are being denied 50% tax relief.

As a result, anyone earning more than £150,000 will have their tax relief whittled away to the basic rate.

This will already bring in £3.1bn by the time the public sector pensions reforms will have saved £1bn in their first year.

On top of this, the limits for the amounts people can pay in to a pension have been frozen for five years - making up the rest of the £4.75bn private sector saving by 2013.

Former Downing Street adviser Dr Ros Altmann said: 'This will just increase the divide between public and private sector pensions. Taxpayers are on the hook for enormous bills for public sector pensions and have been promised reductions that haven't happened.'

On top of this, companies will be left with almost a £1bn bill to comply with the new tax regime, according to Treasury figures.

One adviser called the new calculations that would have to be made 'fiendishly complicated'.

Consultants Lane Clark & Peacock claimed that 300,000 workers would quit pension schemes altogether because of the new rules.

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