Treasury evidence reveals divided views on pensions tax relief

Industry experts are divided on the best approach to pensions tax relief reform, although numerous organisations have raised concerns over the complexity of the current tax relief system.

In its evidence to the Treasury Select Committee, Cushon warned that the current tax relief system is “confusing and failing to incentivise people to pay more into their pension schemes”, recommending that the government look to simplify it.

“Our research shows that the current pensions tax relief system is too complex for most pension members to understand and appreciate how important this “free money” is to their retirement funding,” the submission stated.

“With average pension contributions hovering around the auto enrolment minimums, it is clear that the overly complex system is not doing its job to incentivise pension saving. We believe that a simplified system would encourage greater savings across all demographics and earning levels.

“There is no doubt that the current pensions system is unnecessarily complex, requiring people to understand their annual allowance, tax rate and qualifying earnings, not to mention the lifetime allowance (LTA) on how much they can save into their pension pot and considerations of whether their tax relief is given at source or through a net pay arrangement.”

Indeed, Cushon suggested that the rules are “particularly complicated” for very high earners, who are also affected by the tapered annual allowance, suggesting that removing such complexities could encourage savers to contribute more to their pension.

This was echoed in further evidence from Crowe, which argued that “the current system of UK tax is far too complex with too many taxes producing, in macro terms, insignificant revenue”.

Crowe also commented specifically on issues for higher earners, noting that pension contribution income tax relief has already been “extensively curtailed for higher earners”.

While Crowe acknowledged that such measures aimed to reduce costs, it warned that it may also trigger reduced pension savings as no one deliberately saves into a UK pension without tax relief on the contribution.

More broadly, Crowe warned that continual changes to the tax regime applying to pensions saving is also a disincentive to invest in pension.

“Pensions are a long-term investment and trust in the government not to pull the rug from underneath you has been destroyed in the past 20 years of continual adverse changes to the regime,” it argued.

“One impact of the pension lifetime allowance might be for family business owners to retain their shares through to death to provide income in retirement – as they will have been discouraged from investing in pensions earlier.”

However, the Intergenerational Foundation (IF) focused on concerns around younger savers and lower earners in its evidence to the committee.

In particular, the IF argued that annual £40,000 tax-free pension sum allowed each year is "regressive since it only benefits those on already high wages", with the vast majority of workers in the UK, particularly the young, not able to equally benefit from this tax relief.

“Thus, IF proposes that the £40,000 level should be lowered to better reflect the levels of contributions made by the median worker in the UK,” it stated.

Furthermore, despite industry experts welcoming the government’s decision not to freeze the LTA in the Autumn Budget, the IF argued that the LTA should also be lowered to better reflect the median contributions made by the average employee in the UK.

“IF argues that it would be beneficial for society as a whole if intergenerational impact assessments on tax policy relating to pensions were to be introduced, so that tax reliefs would be assessed fairly with the burdens on the young and those to come taken into account,” it added.

However, the Pensions and Lifetime Savings Association (PLSA) argued that although some suggestions on how pensions tax relief can be reformed appear attractive at first sight, in reality they would come at "great costs to employers and savers at a time of significant economic pressure".

The PLSA argued that although neither the current system, nor any of the seven options for reform widely discussed, meet all of its five principles for pension taxation, "the current system satisfies more of the principles than any other option".

The five key principles used by the PLSA were promoting adequacy, encouraging the right behaviours, fairness, simple to adopt and administrate, and enduring and sustainable.

The PLSA argued that it does not believe that removing the higher rate of pensions tax relief is desirable, as it potentially involves the “double taxation” of some income for some people, in contradiction to the fair taxation principle.

The PLSA also argued that a move from an EET approach would “completely undermine the concept of pensions as distinct from other forms of tax-incentivised savings”, and would result in people being much less likely to invest their money for the long term.

“It would also mean that, rather than as now where government receives tax revenue from pensions at the point when people retire and are most likely to need health and welfare support, they will instead receive it much earlier,” it stated.

“Given that the UK has an ageing society, with associated costs rising to government as society ages, this is a fiscally high-risk strategy and would reduce people’s wealth at a stage in life when they have no other major source of income.”

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