BLOG: Flat is best

Written by Laura Blows
February 2016

We all love a good natter. I’d bet that even those of you disagreeing with me in your head right now – “Not me, I can’t stand all that mindless chatter”, I hear you think – have been debating with colleagues the hot pensions rumour that emerged with the start of the new year. That is, of course, the speculation that the government is set to change the nature of pensions tax relief in the March Budget.

I’m hopeful that those speculating that the government will introduce a flat rate of tax relief turn out to be correct. It’s certainly apt that relief is my response to that rumour, relief that an ISA-style taxation system for pensions may not occur.

ISA-style taxation would mean less money initially going into pension pots, as the tax relief would not be given until the retirement pot is being drawn upon. This would continually mean less money being put into the pot to grow over the years, resulting in a smaller sized-pot at the end.

Instead, flat-rate tax relief seems inherently fair and easy to understand. With the current system, it’s hard to get rid of the unfair picture drawn in people’s minds when they hear that higher earners – those who naturally have more opportunity to put aside money for their retirement – receive a higher ‘gift’ from the government to add to their pension pot compared to lower earners.

As the ABI director Yvonne Braun stated recently, despite the fact basic rate taxpayers account for the vast majority of savers, they currently receive less than 30 per cent of government spending on tax relief for pensions.

Current predictions are that the single level of tax relief will be anywhere between 25 to 33 per cent. This would mean that lower earners get a boost to their pots, which, particularly if promoted well enough, may encourage increased pensions saving. For higher earners, tax relief of around one-third is, I hope, still enough of an incentive to make pensions saving a worthwhile endeavour.

However, not all those paying the higher rate of tax are particularly ‘rich’. The higher rate kicks in once earning over approximately £42,000 – more middle class than millionaire class. That is why it seems fair that, regardless of income, all receive some incentive to save for retirement.

The ‘bonus’ being the same for all means there is no confusion over the message, no misunderstanding that maybe only some need to save, some not, some more than others. It avoids getting bogged down in the details. The statement is clear and simple; the government recommends that all need to save for retirement.

This is an important message, and any change that helps get it across should be lauded. That is why I was frustrated to (once again) hear knee-jerk complaints about the implementation of a flat-rate pensions tax relief system. Yes, there will be practical issues to tackle for administrators, (particularly with regards to salary sacrifice, or surely its demise if the flat rate comes to pass), piled up on top of the myriad of changes pensions scheme administrators are already battling through. But the benefits the change may bring should overcome any short-term inconvenience.

However, as pleased as I am with the idea of flat-rate tax relief, that doesn’t mean I don’t have some niggling concerns in the back of my mind.

I can’t imagine in this time of austerity (and with £21.2 billion being spent on pensions tax relief alone by the government in 2013/14, according to the Treasury) that any change will loosen the purse strings any further. Yet I’m unsure that the reduction in tax relief given to higher earners will be enough to balance (or even make savings) on the extra tax relief given to lower earners, especially with the increased number of savers coming into the system through auto-enrolment.

Easing my concern is a statement from the ABI, which said the move to a flat rate could make fiscal savings for the government of £1.3 billion and would not increase future liabilities for future governments.

But what about the future? If the government moves to a flat rate of tax relief for pensions, will this open the door for future tapering down of tax relief? Will mindsets change from tax relief being a ‘right’ all pension savers have, to a ‘bonus’ gifted from the government? A gift that can be withdrawn once the idea of people being fully responsible for their own savings and retirement grows?

I sincerely hope not. But maybe I’m just being pessimistic. Focusing on the present, I’m certainly a fan of flat-rate tax relief as a means of simplifying the pensions system and encouraging retirement saving.

Hopefully the rumour comes true and a flat-rate system of pensions taxation isn’t just all talk.

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