Friends Life has become the latest major pensions firm to lend its voice to calls for reforms to introduce a single rate for pensions tax relief, with the firm putting the £40,000 annual allowance in the crosshairs for cuts to offset any increase in government expenditure.
A consensus appears to be forming around an idea, originally put forward last year by the Centre for Policy Studies, to reform tax relief on pensions to effectively limit the amount paid to wealthier workers and concentrate spending to create a greater incentive to save for lower earners.
Specifically, a paper written by Michael Johnson called for pension tax relief to be set at 33.3 per cent - meaning a saver would get 50 pence for every £1 invested - up to a limit of £8,000, or £12,000 in total, each year. In tandem, the lifetime allowance limit would be scrapped.
Friends Life’s call for cross party commitments on pension taxation similarly calls for a single 33 per cent level for tax relief, with the provider suggesting using the annual allowance as the “lever” to control future expenditure on pension tax relief.
This would allow the lifetime allowance, currently set at £1.25m, to be scrapped - and could also solve the issue that replacing marginal rate reliefs with a single rate of 33 per cent is likely to increase government spending at a time when severe cuts are needed to reduce the deficit.
The issue was raised by pensions minister Steve Webb, who suggested creating a simpler flat tax relief rate of around 33 per cent. Other providers such as Partnership and Royal London have backed calls for such a move.
Friends Life’s other proposals include:
• minimum automatic enrolment contributions for employees increased to reach 6 per cent in 2019;
• employer contributions should continue to be free from National Insurance and income tax; and
• measures should be introduced to prevent higher and additional rate taxpayers benefiting unfairly from salary sacrifice.
As part of automatic enrolment, combined contributions from employees, employers and tax relief are expected to rise to a maximum of 8 per cent by October 2018.
Andy Briggs, group chief executive at Friends Life, stated that the government can go some way to reducing the retirement gap by introducing further structural reforms.
“Currently, higher and additional rate tax payers make half of the pension contributions but benefit from 75 per cent of the tax relief. That has to change, to increase the pension savings of those that need it most.
“The principle behind the current system of pension tax relief is that tax is paid in retirement at the same rate as the tax relief given on contributions. But that is a myth, as only a small proportion of people continue to pay higher rate tax once they retire.”
Mr Briggs argued that a flat rate of 33 per cent would be effective and easily understood by consumers, with a flat rate lower than this being a backwards step as many basic rate taxpayers already get 32 per cent relief today by contributing via salary sacrifice.
This is a reference to previous statements by Mr Webb relating to a flat-rate tax, which has seen him propose rates of as low as 20 per cent.
Mr Briggs added: “Our proposal can deliver Treasury savings to help reduce the public deficit while introducing the fairness we call for and while encouraging increased levels of pension saving,” he noted.
peter.walker@ft.com
