Four in 10 people surveyed by PricewaterhouseCoopers said they favour moving towards a pension tax treatment similar to that for Isas, where contributions are made from post-tax income and any returns are tax free.
In the summer Budget, the chancellor announced a green paper review into the way pensions are taxed, proposing three main options: retaining the current set-up with a bit of tinkering to the lifetime and annual allowances, moving to a system of flat-rate tax relief and going ‘taxed-exempt-exempt’ like Isas, with a government top-up on pension contributions.
PwC surveyed 1,197 working UK adults at the start of this month, and found that when asked to choose the most appealing tax scenario, only 27 per cent picked the current system – where people and their employers receive tax relief on their pension contributions and the pension is 25 per cent tax-free at retirement.
The largest amount of people preferred being taxed while they are working, rather than in their retirement, stating it would help them plan better as they will not have to factor in tax deductions. Only one in seven said the current tax exemptions on pension contributions incentivise them to save.
Six in 10 of those polled said that constant changes by the government to how pensions are taxed is the biggest barrier putting them off saving more into their pension, followed by people not understanding how much they need to save for an adequate retirement and the pensions system being too complicated.
The research also revealed that the majority of people do not understand how pensions are taxed, with two thirds not being able to correctly identify the current system.
Philip Smith, head of PwC’s defined contribution pensions team, said that the results showed people want a ‘once in a lifetime’ overhaul of how pensions are taxed, in order to create a simple and stable system which they can understand and trust.
“Moving towards an Isa-style tax system would create consistency across people’s savings pots and help people plan for their future with more certainty.
“Our research shows people would much rather take the tax hit on their retirement savings while they are working, rather than having to worry about tax deductions in their retirement.”
He noted that moving to a new tax system for pensions is no easy task for an industry that is already grappling with the pensions freedom changes.
“This would require a huge re-think from employers, pension providers and the government to how they provide pensions.”
Experts from consultancy Towers Watson last week gave a broadly similar view, explaining that chancellor George Osborne may be inclined to plough forward with his pension reform agenda, especially since a pension Isa plan would artificially flatter borrowing numbers.
They also pointed out that many hurdles would need to be overcome, including how new and old style pensions would be segregated, as well as making changes that worked across both DC and DB schemes.
Raj Mody, head of pensions consulting at PwC, said: “We believe any new system should include a simple to understand incentive from the government for retirement savings that would allow the lifetime and annual allowance tax regime to be abolished.”
peter.walker@ft.com
