Budget announcement will see tax relief on pensions contributions cut for those earning more than £150,000

Top earners are among the big losers from the budget after the chancellor announced he would scrap generous tax breaks on pension contributions for people earning more than £150,000.

Alistair Darling said he wanted to end the anomaly that results in one-quarter of all tax relief going to 1.5% of top earners.

He said people earning more than £150,000 would see the tax relief they enjoy reduced from 40% to the standard rate of 20% following the introduction of a taper in April 2011.

The move will be welcomed by anti-poverty campaigners who argue that wealthy individuals are generously rewarded with tax benefits for making pension contributions compared with most taxpayers.

But the pensions industry, employers and insurers are expected to be dismayed. They will argue that pension schemes and pension savings have already been battered by falling stockmarkets and rising life expectancies, which have increased the costs of providing pensions.

Go for it, Darling. Removing full tax relief on pension contributions for higher-rate taxpayers may be politically dangerous but it is the right thing to do. It is nonsense that higher-rate taxpayers, the people most able to save for retirement, receive a 40% tax incentive whereas basic-rate taxpayers are offered 20%.

The system is bizarre, never mind unfair. It stems from the obsession of many governments for addressing pension incentives through the tax system. In the days when disparities in income were not as great as they are now, the approach may have made sense. But the effect these days is that the more you earn, the higher the rate of available tax relief.

The arithmetic has been obvious to many well-paid folk in the City, who for years have been directing their bonuses into their pension pots and arranging a low-cost loan to meet any additional living expenses. You can't really blame them - they are doing what the system has encouraged them to do. It is one reason why we have the amazing statistic that 55% of tax relief on pension contributions goes to 10% of wage earners - higher-rate taxpayers.

Reform, then, is overdue. Yes, it would be portrayed as a raid by a cash-strapped government on the pension funds of the hard-working folk of Middle England, but it doesn't have to be that way. Equalisation of tax relief on pension contributions wouldn't necessarily take place at 20%. A new rate, applicable to all, could be struck a few percentage points above 20% and simply be redistributive. Admittedly, a chancellor in Alistair Darling's position would be tempted to keep the odd billion or two, but equalising the rate of relief is a reasonable ambition regardless of whether the public finances are in a mess.

But Darling, if he is really in a mood to be radical on pensions, can't ignore the other inequality - the fact that final salary schemes are alive and kicking in the public sector but in their death throes in the private sector. The two issues go hand in hand since a higher-rate taxpayer in a final salary scheme would expect his or her employer to meet any shortfall from a reform of the system of pension relief. When the employer is the state, the private sector would rightly cry foul if it is being short-changed. Something would have to give in the public sector.

No wonder the Treasury is still said to be wavering. But if the chancellor can't muster the political courage to be radical on pensions at a time like this, he never will.

Shadowy enforcer

So, Johnny Cameron, Sir Fred Goodwin's right-hand man at the Royal Bank of Scotland's corporate and markets division, will not be joining Greenhill, the boutique investment bank. Problems in getting his application through the Financial Services Authority seem to have been the issue.

But what was the process at work here? Nobody wants to say. It seems Cameron didn't make an application to re-register with the FSA, as individuals switching firms must do, so he has not been formally barred from working in the regulated financial services industry.

Instead, it appears that somebody at the FSA had a quiet word with Cameron, pointing out that the regulator would be investigating RBS's blow-up. That conversation seems to have been sufficient to persuade Cameron that his chances of getting clearance from the FSA were poor.

The temptation here is to chalk up a victory for the new, "intrusive" FSA, the one that wants to be feared in the financial kingdom. But the lack of transparency in the FSA's workings is worrying.

One can understand why the regulator doesn't want to expose itself to claims for restraint of trade, which might be the effect of a formal ruling against any former bankers at RBS and HBOS. But operating via a nudge and a wink in the shadows is not a sensible way for a regulator to behave.

Few will weep tears for Cameron but that's not the point: the FSA needs to formulate a credible policy that it is prepared to defend in public. Sooner or later the FSA will encounter a fallen banker who takes the view that his own failures were no worse than the regulator's.

nils.pratley@guardian.co.uk

Anti poverty campaigners yesterday urged the government to use the budget to scrap pension tax breaks that boost the retirement pots of wealthy savers despite warnings from employers that an attack on savings benefits would bring the pensions industry to its knees.

The campaigners said the Treasury could save as much as £10bn a year if higher rate tax relief was replaced with a flat rate contribution for all pension savers. With a new "level playing field" for Britain's estimated 15.5 million pension savers, ministers could afford to boost subsidies for all savers and not just the better off, they said.

Ros Altmann, a long-time campaigner for a more equal system of long-term savings, said millions of low-paid workers could expect to live in poverty despite saving for their retirement because the majority of government subsidies were channelled to the better paid.

A spokesman for the Liberal Democrats said the party supported calls to end higher-rate pension tax subsidies

The call came amid speculation that ministers were preparing a wide ranging review of pension tax subsidies in the budget that could include ending tax breaks for top rate taxpayers.

An attack on this group, who earn more than £44,000 a year, could save between £9bn and £10bn a year. An alternative plan to cut higher rate relief to people earning more than £100,000 a year could save the exchequer up to £3bn.

Higher rate taxpayers claim 55% of the £19bn paid by the exchequer to subsidise pensions, according to recent figures. Since 5 April this year, savers have been able to put up to £245,000 a year into a pension tax-free - up from £235,000 last year. Many City workers put much of their salaries into a pension as the generous tax advantages make it worth taking out a loan for living expenses.

Pensioners have to pay tax on their income once they have retired, but most pay tax at the standard rate of 20% - since they draw less than £44,000 a year from their pension pot. Only 2% pay tax at the higher rate. This gives higher-rate taxpayers an enormous benefit of tax-free savings that is never clawed back.

Ministers have long considered it unfair that better paid workers claim the lion's share of pension tax relief, but have balked at cutting subsidies that the pensions industry argues must remain if pension savings rates are to be maintained.

The CBI warned that plans to scrap tax relief at 40% would deter a large number of people from setting money aside for their retirement and damage retirement savings schemes beyond repair.

Deputy director general John Cridland said: "We are alarmed that this might happen. It comes at completely the wrong time and will discourage people from saving. It would have a disastrous effect when occupational schemes are already coping with large funding deficits."

Pension advisers and insurers also lined up to defend the status quo, arguing that cuts to pension subsidies would open up bigger holes in final salary-related occupational retirement schemes.

John Ball, a pension adviser at actuaries Watson Wyatt, said: "Reforming a tax relief that predominantly benefits higher earners is not as unthinkable as it once was but remains easier said than done."

However, Altmann argued the subsidies were designed for a bygone age and failed to address the needs of savers. The cost has also soared, from £12bn in 2000 to more than £19bn last year.

"Why should the people who need the subsidy least get double the amount paid to people who need it most. The government wants to encourage everyone to save and yet it gives the lion's share to people who have the most in income terms."

Lord Oakeshott, Lib Dem Treasury spokesman, said the government would also need to consider the impact on public sector pensions. "You have to ask why MPs, judges and top civil servants should be immune from cuts in pension subsidies."

Following last week's Rescue Your Pension special, many readers wrote to our clinic for advice. Here is an edited selection of your questions - and the experts' responses

We posted your questions about pensions on our website at guardian.co.uk/money on Wednesday for our panel of experts to answer. On the panel were Martin Bamford, an independent financial adviser at Informed Choice, Laith Khalaf of Hargreaves Lansdown, and Richard Kitch of Age Concern and Help the Aged. Answers may have been edited but full versions have been sent to the readers concerned.

Q: My 65th birthday is next week and I am undecided as whether to defer my state pension or not. Does it pay to defer for as long as possible? Would a change in the bank rate change one's decision? And is there an optimum age at which to cease deferment for maximum benefit?
Deryck Johnson

A: Martin Bamford says:
Your decision to defer will largely depend upon your need for income. If you do not require this additional source of income, the increases in deferment depend how you ultimately decide to take the deferred entitlement; you can receive either a bigger pension or a lump sum.

If you defer your state pension for a minimum of five weeks you will receive an increased payment of 10.4% per year. The lump sum is based on the weekly state pension entitlement you would have received plus 2% above the Bank of England base rate (currently 0.5%). To receive this you must be deferred for at least a year.

Any increase in the base rate would increase the interest you would receive, but I would not base your decision on this or try to calculate an optimum age. Instead consider your income needs and assess when you think your personal income sources will not be sufficient. Remember also that the state pension will incur income tax, so you may not wish to pay any more tax than necessary.

Q: I am a retired teacher and my wife, who is also a teacher, will soon qualify for early retirement at 55. We are both members of the Teachers Pension Scheme. How secure is the final salary status of this scheme for current pension recipients and those who are deciding whether to retire early?
Bob and Rosaleen Murphy

A: Laith Khalaf says:
It is backed by the government, there is simply no better guarantee of benefits. Nothing is 100% guaranteed, but this is as close as it gets.

Q: The company I currently work for runs a money purchase scheme and I have been a member of the scheme since 2003. The estimated pension will be around £2,300 per annum from the age of 60.

I have currently built up £600 worth of annual pension through this scheme. My company pay in 11% of salary.

I have the option of taking this amount (less tax and NI) as cash - in other words pulling out of the pension scheme.

I am wondering if I would be better off putting this amount (£200) into an Isa each month and moving some into equities as time goes on, thus building up a reasonable lump sum to go with other lump sums that I have. The returns from this pension seems to be paltry and the capital sum actually decreased last year.
Pete (Bristol)

A: Martin Bamford says:
"An 11% employer pension contribution is pretty generous, and as you have already pointed out, it would be subject to income tax and National Insurance if you took it as a cash payment instead.

This really comes down to a question of flexibility. If you use the money to build an additional pension fund, the benefits are restricted to 25% of the fund as tax-free cash (a pension commencement lump sum) and the remainder of the fund being used to provide income in retirement. If you take the cash now (after tax), you can access 100% of the money when you want and how you want.

After tax and NI, you could utilise your full £7,200 Isa allowance each tax year with the cash, as it will be less than £600 per month.

In terms of actually investing the money, there is little difference between the pension or Isa environment. You have access to a similar range of funds and the tax treatment of the funds is similar.

Q: I am a 61-year-old married woman working for local government four days a week. But due to cuts I have the option of taking early voluntary retirement this year. I will get a lump sum from my employer and an annual pensions. I also have AVCs that were valued last year at around £18,000.

My question is on the AVCs and what option I should take.

Should I add the value to my tax-free lump sum; purchase additional service to increase my annual pension or purchase a separate annuity from Prudential which administers the in-house AVC contracts?
Anne Wells

A: Laith Khalaf says:
I would investigate the possibility of buying added years or alternatively using your AVC to fund your tax-free cash and thereby increasing the annual pension payable. If this is not possible and you do end up buying an annuity, shop around - don't just accept the Pru's rate, it may not be the best.