The Association of British Insurers (ABI) has called for a flat rate pension tax relief system in a bid to eradicate distribution inequality.
The “need to overhaul” was highlighted by ABI-commissioned research which shows that women, lower paid people and the young are missing out on valuable tax relief.
When paying into a pension, savers receive tax relief on any contributions they make and under the current system, tax relief is paid at the highest rate of income tax someone pays.
Findings
The report carried out by the Pensions Policy Institute (PPI) found:
- Basic rate taxpayers make up 83.4% of total taxpayers, they only receive 26% of the pensions tax relief related to defined contribution (DC) pension contributions;
- The number of people earning less than £30,000 ($37,383, €33,110) who now qualify for tax relief has increased to 62% due to automatic enrolment. However, only 24% of tax relief goes to them;
- Some 42% of people who contribute to a DC pension are under 40, but they only receive 27% of the available tax relief. People in their 40s and 50s receive two and half times as much tax relief from the government; and
- Also 71% of DC tax relief is granted to men, as they pay 69% of the contributions.
According to the PPI, changing the current system to a single rate would increase the sum of pensions tax relief for the basic rate taxpayer to a more equal 42% from 26%.
The ABI said the current pensions tax relief system is “too complex” and “years of tinkering” have made it difficult for savers to plan for the long term.
Radical proposal
Jon Greer, Quilter head of retirement policy, said: “Moving to a flat rate of pension tax relief is a radical proposal and one that must be carefully considered. Pensions are for the long-term and so any policy making needs to be made with that in mind.
“We cannot have an overhaul of the pension tax system only to find it flawed and altered when challenges present themselves.
“Consultation on how it could be implemented, and to which schemes, is important as on the surface it sounds like an easy thing to do, but in practice it is not necessarily the case.
“While a flat rate of 30-33% would be re-distributive and benefit basic rate taxpayers, it would be broadly revenue neutral for the government.
“And this begs the question, what will they do next? Once pension tax relief is decoupled from marginal income tax rates, it is a slippery slope and there would be little to prevent future governments then cutting tax relief to 25% or even 20% to save money.
“We need more than tweaks to policy to change the perception of pensions and their perceived complexity and open up pensions so that information is accessible, timely and is framed in a way that is easily understood.”
Fairer system
The ABI believe its ideas will remove inequalities in pension tax relief.
“Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving,” Yvonne Braun, director of long-term savings and protection at the ABI, said. “However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”
Andrew Tully, technical director at Canada Life, added: “Pension tax relief is complicated, and any change requires properly thinking through. We must learn the lessons of the past and not make any kneejerk changes.
“There are a number of difficulties in implementing changes as we have different systems of giving tax relief.
The vast majority of tax relief is given to defined benefit (DB) schemes so any changes need to cover both DB and DC. Making changes in the DC market only is simply playing around the edges.
“There is a huge amount of complexity in the tax system, with all of the various allowances, so any changes need to simplify matters to help people better understand the benefits of saving using pensions as the vehicle.”
