Pensions tax relief administration consultation 'raises more questions than answers'

The government’s call for evidence into pensions tax relief administration has received a mixed reception from the industry, garnering criticism for raising “more questions than answers”.

The government’s consultation seeks to gather views on the operation of the main methods of administering pensions tax relief, these being net pay and relief at source (RAS), as well as looking into what improvements might be made, with responses required by 13 October.

AJ Bell senior analyst, Tom Selby, commented: “While the government has started to fulfil its manifesto commitment to ‘conduct a comprehensive review’ of ways to address the issue of low-earning workers in ‘net pay’ schemes missing out on pension tax relief, this initial stage of a call for evidence raises more questions than answers.

“The suggestion a charge could be imposed on members in relief at source schemes who earn below the personal allowance would be a retrograde way of solving the inequality that exists in the system and should be ruled out immediately.”

He said that it was not clear what this approach “might mean for the pension saving of those with no income” and added that “all other options on the table either add extra complexity to the system or create additional cost for employers”.

A number of industry members called for pursuit of simplicity in any changes to the system, with Aegon head of pensions, Kate Smith, stating that solutions need to be “simple for savers to understand and easy and inexpensive for employers, providers and the government to administer”.

Canada Life technical director, Andrew Tully, agreed, stating: “It’s crucial that any changes are made with simplicity in mind. The current situation is fiendishly complex and any poorly considered changes may only make this worse.

“The vast majority of tax relief is given to defined benefit (DB) schemes so any changes will need to cover DB as well as defined contribution (DC). Making changes for just the DC market is simply playing around the edges and will not help people better understand the benefits of saving in a pension.”

Hymans Robertson head of DC provider relations, Mike Ambery, stated: “While we are supportive of this issue being addressed, any solution needs to be put in context of the overall £40bn tax relief bill. It’s a fiendishly complex issue to address and the government needs to take care that it doesn’t adversely impact the wider tax relief processes.

“The four solutions outlined by the government in this consultation seem too complicated and the idea of moving all DC schemes to RAS feels like an extreme fix for the scale of the problem.”

Smith also highlighted that some groups had been left more vulnerable by the current system than others, stating that “Low earners, mainly women, who are saving in pension schemes which use net pay schemes to administer pension tax relief are not receiving the 20 per cent tax relief on their pension contributions to which they are entitled”.

She added that a system that ensured people were “treated equally and fairly” could “make the difference for people to decide to keep on saving, or to opt out of their workplace pension scheme”.

Under the current system, Now Pensions has estimated that around 1.75 million earners could be missing out on up to £111m of pensions tax relief.

The People's Pension head of policy, Tim Gosling, agreed that an improved system could lead to increased saving, commenting: "Tax relief should provide an incentive for all people to save and boost pension savings, but this tax flaw is depriving 1.2 million lower earners – mostly low paid women – of a much-needed boost to their savings.

“This issue threatens to damage public confidence in auto-enrolment and lets down those who need to increase their retirement savings most. Fairness demands this is fixed to ensure all savers receive the tax relief they’re entitled to."

    Share Story:

Recent Stories

How the bulk annuity market is changing
Laura Blows speaks to Peter Jennings and Prash Mehta from Just about trends in the bulk annuity market and how this could impact trustees hoping to secure insurer engagement in 2022 and beyond
DC master trusts
Pensions Age editor Laura Blows, editor of Pensions Age look at developments within the DC master trust market with Paul Leandro, partner at Barnett Waddingham, and Mark Futcher, partner and head of DC at Barnett Waddingham.

Advertisement Advertisement