Treasury urged to consider pension tax reforms amid complexity concerns

The government has been urged to consider key reforms to pension tax relief, followed by a period of stability, after the Association of Consulting Actuaries (ACA) raised concerns over the complexity of the restrictions surrounding the current regime.

In its evidence to the Treasury Select Committee, the ACA argued that important policy decisions appear to often be considered hastily and with limited resource or parliamentary time set aside to maintain or amend existing legislation if problems are identified.

The ACA also noted that many savers, particularly younger savers, are facing competing saving needs in areas such as housing, student loans and resilience requirements, warning that recent negative economic shocks could crowd out pension saving.

In light of this, the association argued that future reform of pensions relief should focus on refining incentives for the next generation of savers.

One such recommendation from the ACA was to allow some limited flexibility for people to dip into retirement savings before retirement to meet urgent resilience needs, such as those that emerged amid the pandemic.

The ACA also acknowledged that there is a "powerful argument" to tackle current resilience challenges through other, non-pensions, policy mechanisms.

In particular, it said that getting the best value for the public purse from the tax reliefs provided for pension schemes requires a parallel exercise to help people to have both sufficient income to cover basic resilience needs and build up pension savings.

Indeed, the ACA's evidence also highlighted recent findings from Nest Insight's trial on auto-save as demonstration of this, suggesting that it could "meaningfully boost employee financial resilience".

ACA chair, Steven Taylor, commented: “Pensions tax relief continues to be a bedrock of incentives to save and we believe will remain vital for the next generation of pensions savers.

"However, we believe significant improvements can be made, both to reflect previously identified technical flaws and also to help refine a more flexible pensions and savings environment in these challenging times.”

Adding to this, ACA Pensions Tax Committee chair, Karen Goldschmidt, noted that while the pension tax relief cost is "inevitably significant" because of its broad coverage of the population, she suggested that it is nonetheless good value for money, as it can offset the need for materially higher state pensions and other state aid.

“For pension tax relief to be effective, people need confidence that the regime will be stable and that they can make the long-term commitment over decades to build up a secure retirement income," she continued.

"Especially given their now wider population coverage, we believe tax relief limits, but particularly the lifetime allowance, should be restored to a more appropriate level with automatic annual indexing built in and respected.”

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