The Pensions & Lifetime Savings Association (PLSA) has said that none of the four "main" options for pension tax reform that are commonly discussed meet its 'Five Principles for Pension Taxation'.

Its report outlined five principles on which the PLSA believes any reform should be based, including the need for reforms to help savers make the right decisions about retirement saving, and to be simple for employers and schemes to adopt and administer.

Other listed principles were the need to help everyone, regardless of their type of employment, to save for retirement, and to promote adequate incentives and financial support for retirement saving.

Finally, the report stated that reforms should be designed to avoid repeated change in order to build confidence in long-term saving.

The PLSA noted that none of the four main options for reform of the current system of pension taxation achieved all of the listed principles.

The four options analysed in the report were TEE, where income tax is fully applied to all contributions but investment returns and income in retirement are both exempt from tax, a single rate at 20 per cent, a single rate at 25 or 30 per cent and a reduction in the Annual Allowance (AA) and Lifetime Allowance (LTA).

The current system was deemed to meet more of the published principles than any of these potential reforms, which were picked because they had frequently been discussed by the government, the pension sector, consumer groups and the media over the last five years.

However, it was noted that some sort of reform was likely as the government would be “reviewing all options to relieve pressure on the public purse” due to the “very challenging fiscal climate”.

As such, the report suggested that, rather than embarking on a major reform of pensions tax relief, there was more value in addressing some of the more specific and technical shortcomings of the current system, such as the inequalities created for low-income savers due to the differences in tax administration systems used by different pension schemes.

PLSA director of policy and advocacy, Nigel Peaple, said: “More, not less, pension saving is needed so that everyone will have an adequate income in retirement.

“We recognise that the UK is facing a very severe economic and fiscal environment as a result of the pandemic; but any potential reforms should be fully thought-through and assessed. The Five Principles for Pension Taxation can help government make the right decisions.

“Our assessment suggests that no single reform or the current system is perfect. Most reform options leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes.

“Introducing major change to the system of fiscal support for pensions risks undermining hard-won confidence in pensions. This, in turn, could undermine the gains made in recent years, particularly through the advent of automatic enrolment and improvements in governance.”

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