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Cost of pension tax relief hits £41bn

But this is ‘no excuse’ for the chancellor to raid it in the upcoming budget


HM Revenue & Customs has published figures for pension tax relief which show that costs hit £41.3bn ($56bn, €48bn) in 2019-20, up from £38.2bn in the previous 12 months.

But this is largely due to the rise in mandatory contributions under automatic enrolment, said advisory firm LCP, which rose from 2% in 2017-18 to 8% in 2019-20.

This means that the increase in the cost of pension tax relief is a reflection of people saving more.

Out of the gross £41.3bn, nearly two thirds (£20bn) comes from the contributions made by employers into occupational and personal schemes, whereas saving among the self-employed fell – now accounting for less than 1% of the total cost.

The tax collected from pensions currently in payment rose as well, to £19.2bn over the latest two years from £18.3bn.

But LCP estimates that around £1 in every £7 of the tax relief bill relates to payments by companies to clear deficits in their defined benefit (DB) pension schemes – between £10bn to £15bn a year – and around £1 in £3 relates to public sector DB schemes.

‘More saving, not less’

As a result, the advice firm said that the latest figures present “no excuse for a budget raid on pension tax relief” by chancellor Rishi Sunak, as he gears up to outline the Treasury’s plans later this month.

This is because current levels of pension savings are already “widely agreed to be inadequate” and further cuts could undermine saving for retirement even further, LCP added.

Karen Goldschmidt, pension tax specialist at LCP, said: “The chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3bn for the ‘cost’ of pension tax relief. But these figures provide no excuse for a budget raid on pension tax relief.

“The growth reflects millions more workers savings towards their retirement and should be welcomed, not used as an excuse for cuts. In addition, a large part of the headline cost of tax relief relates to the cost of public service schemes, where a reduction in relief would either result in big tax bills for public servants or generate little up-front revenue for the government.

“The tax relief figure also includes the vital contributions which firms are making to cover the shortfalls in their pension schemes which the government should be encouraging rather than taxing more heavily.

“Overall, we need more pension saving, not less, and a raid on pension tax relief would send entirely the wrong signal to millions of people who have just started out on their pension saving journey.”

‘Highly complex tax system’

Tom Selby, head of retirement policy at AJ Bell, echoed Goldschmidt’s feelings as he argued that “too many people are still saving too little to fund a decent retirement, and successive governments have added damaging complexity and uncertainty to the system”.

“Encouraging higher levels of saving and making the rules people have to navigate simpler must therefore be a priority for the government.”

Jon Greer, head of retirement policy at Quilter, said that while it is encouraging to see higher level of savings, the UK’s “highly complex tax system” is hitting an increasing number of people as annual allowance and lifetime allowance (LTA) charges “begin to spiral”.

And the government’s decision to freeze the LTA at £1.07m until at least 2026 is likely to impact a greater number of savers as well.

“Annual allowance charges are up around 15% in 2019/20 compared to the previous year. Similarly, the total value of lifetime allowance charges reported by schemes in 2019 to 2020 increased 21% to £342m,” he said.

“It is worth bearing in mind that the lifetime allowance tax charge was originally only supposed to impact 5,000 individuals yet is now penalising far more than that each year.

“The government should be doing everything it can at present to encourage savers to put money away for their retirement. While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the annual allowance don’t hamper the good work the policy has done.

“These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore, time and time again catch people out.”

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