Pensions tax changes could damage long-term saving, warns SPP

Pensions tax changes that would reduce take-home pay would be detrimental to long-term retirement saving, according to the Society of Pension Professionals (SPP).

A paper published by the organisation to examine the issue of reforming pension tax argued that moving forward with changes that would eat into savers’ pay cheques would risk increased opt-outs, and the creation of a culture where opting-out is justifiable in the minds of individuals.

It added that the issue could be particularly detrimental if workers suffered immediate tax consequences on employer pension contributions.

It additionally pointed out that the scope for making savings from pensions tax was limited, despite the gross cost of pension tax relief being quoted by HMRC as £37.2bn for the tax year 2017/18.

This was due to the majority of this figure relating to employer contributions to defined benefit (DB) schemes, including deficit repair contributions that related to pensions for historic service rather than current contributions for individuals.

The figure for individual member contributions in both DB and defined contribution (DC) schemes for the year was significantly lower, at £6.3bn.

It further asserted that the actual cost of pensions tax relief is significantly less than amounts often quoted, noting that the net cost of pensions tax relief quoted by HMRC for 2017/18 of £19bn was arrived at by deducting income tax on pensions currently payable.

The paper continued: “These pensions relate to an entirely different cohort of individuals, and the tax payable on these pensions bears no relation to the reliefs currently being provided. The income tax eventually paid by the cohort currently receiving relief is likely to be far greater, due to the higher value of the pensions in payment and the increased number of individuals receiving taxable pension benefits.

“Therefore, using the current amount of tax received to net off against total costs is not a like for like comparison and overstates the true cost of tax relief. It also risks undermining long-term retirement saving and successfully establishing auto-enrolment, as any increase in pension saving will increase the quoted cost without an immediate increase in the tax received on pensions payable.”

The SPP also argued that any alternative system that did not provide relief at an individual’s marginal rate, or a single ‘flat rate’ of relief, would not be practical for DB schemes, while contriving to deliver a split approach that is fair to both DB members and DC members would be difficult.

The paper stated: “There has been a lot in the press recently about reforming pension tax. And there are good reasons for improving the pensions tax regime, both political and technical. However, this is a complex and often misunderstood area and it’s important that the key issues are well understood when proposing reform.”

In January, the Pensions and Lifetime Savings Association’s Policy Board made setting out key principles for any reform of pension taxation a priority policy issue for 2021, while just this week reports suggested that the government is planning to target pensions in order to help pay for its response to the Covid-19 pandemic.

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