Personal Pension  

Beginning of the end for pensions tax relief?

    Beginning of the end for pensions tax relief?

    As usual, the rumours were circulating wildly in the run-up to the Summer Budget.

    Given the catastrophic bombshell dropped by George Osborne in March 2014, we all now believe anything is possible when it comes to Budgets. So the idea that pension tax relief may be wiped out with a single blow and replaced by a taxed exempt, exempt (TEE) regime was not beyond the realms of credibility.

    As it happened, what we got was a watered-down version of the most outlandish rumours. Instead, of an immediate change, the government suggested a good hard look at pension tax relief to see if it is the best system available. And it launched a Green Paper to get the conversations going.

    There are three big government drivers for this change. The main one is a need for hard cash. Pension tax relief is an expensive business. In 2013/14 the cost was £34.3bn; a figure only slightly tempered by the tax collected on pension payments of £13.1bn. Even taking into account that the tax expected to be collected in later years is now set to go through the roof, thanks to pension freedoms, pension tax relief still represents a cloth that needs cutting.

    Tax relief paid out (£bn)30.030.829.430.835.334.835.134.3
    Tax collected on pension payments (£bn) 10.59.310.810.711.312.012.813.1
    Difference 19.521.518.620.124.022.822.321.2

    Source: HMRC. Table PEN 6

    Add to this the fact that two-thirds of pension tax relief is spent on higher and additional rate taxpayers, and it does not look good. The trite answer, of course, is that these people pay the most tax, so they should receive the most tax relief. But many are calling for a fairer distribution of government incentives for saving that does not favour the better-paid so much.

    Another big driver of the changes is the personalities at the centre of pensions policy. The previous pensions minister, Steve Webb, and the current pensions minister, Baroness (Ros) Altmann, are both keen advocates for change. Both like a hobby horse, and are determined to see their views come to fruition.

    And the last driver is that the context has changed. We are living in a world of increasing longevity, less private defined benefit provision, and wider defined contribution cover. A world now including pension freedoms and the ability to access all your cash at retirement.

    And it is a world of automatic enrolment where you become a member of a pension scheme without even realising it. So is it any wonder people are doubting whether we even need the carrot of tax relief on contributions anymore. After all – many people do not make an active choice to join.

    The consultation paper itself is wide open. It is short, sets the context, and although it does pass comment on possible solutions – such as the TEE regime – the comment is brief and non-binding. It does not run through the possible solutions.