The Treasury has ruled out “significant reform” of the UK’s pensions taxation system, it has been revealed.
AJ Bell chief executive Andy Bell in February this year wrote to the Pensions Minister urging the government to take a “more measured, long-term approach to pensions tax policy” centred around an independent review of the pensions tax system.
A response came from Treasury financial secretary Jane Ellison on 2 March who said that following the consultation on pensions taxation in 2015/16, “now is not the right time to undertake significant reform”. “Given this, the government does not think it is necessary to convene an independent pensions commission at this time,” she wrote.
There had been proposals within the consultation on pensions taxation to move to a flat-rate pensions tax relief or an ISA-style form of pensions tax relief, although the latter received opposition from the industry. AJ Bell now believes that it is highly unlikely that there will be any changes; especially as the Brexit process is likely to dominate government resources for the next two years.
However, the government’s back-down on increasing national insurance contributions for the self-employed has led to fresh fears that higher rate pension tax relief could be in line to pick up the £2bn shortfall, but given the recent correspondence from the Treasury, it would be another huge u-turn in government policy.
Commenting, Bell said: “Pensions tax relief has for too long been the piggy bank that Chancellors raid when they need to fund a high profile new initiative. As a result, it is constantly the subject of feverish speculation ahead of Budget statements.
“This is not helpful for savers. It creates layers of unnecessary complexity as the rules change and unforeseen complications arise, which all add to the perception of pensions being ‘difficult’. In addition, the threat of future changes and removal of benefits undermines people’s confidence in the pension system. Ultimately, this complexity and uncertainty puts people off saving and is one of the main causes of the savings gap we have in the UK today.
“While the Chancellor has not been able to resist tinkering completely through the unnecessary cut to the Money Purchase Annual Allowance, hopefully the Treasury’s response to us gives people some comfort it will not subject pensions to more unnecessary uncertainty, at least during this Parliament. If the government does turn its attention back to higher rate pensions tax relief, it will seriously undermine its credibility.”
Gowling WLG director Chris Stiles added: "Today’s confirmation that the government is not planning yet another reform of pensions tax will be welcomed by the pensions industry and will be reassuring to many who save in it. With anything as long-term as pensions, confidence is crucial. The perception that the government may change the rules at any time between saving and retirement undermines that confidence.
"The last significant overhaul of the regime was in 2006, but there has been extensive tinkering with it since then, which still continues (the latest being the reduction to the money purchase annual allowance). There are also regular rumours of more drastic reform. This has all caused huge complexity and uncertainty for schemes and members.
"Nothing lasts forever, though, and whilst today’s confirmation may give respite for the time being, the cost of tax relief to the Exchequer is such that the issue is bound to come up again at some point."