The Association of Professional Financial Advisers has told the Treasury to stop fiddling with pensions tax relief, and instead focus on increasing auto-enrolment savings rate.
In response to the Treasury’s green paper on tax relief, Apfa warned changes proposed for the current pensions taxation system would be “undesirable”.
In July, the Treasury proposed taxing pensions like Isas, where contributions would be taxed and withdrawals would be tax-free rather than the current system where people are taxed on withdrawals, rather than contributions.
However, Apfa said it is “concerned” that this proposal would “completely undermine” the current incentives for pensions and destroy pension saving as we know it.
“It is not credible to ask people to trust the government to deliver promised tax relief at a distant future date.
“There is a fundamental challenge that needs addressing in increasing pension saving. The result will be more tax relief, but this would be a sign that the government’s policy was working.”
Instead, the adviser trade body believes the government should look at how to raise auto-enrolment pension contributions to above 8 per cent.
Auto-enrolment minimum rates currently stand at 2 per cent but are expected to increase to 3 per cent from employees and 5 per cent from employers by October 2018.
According to research by PricewaterhouseCoopers, published today (30 September), someone starting work today, aged 22, will need to save a total of 15 per cent of their annual salary towards their pension in order to reach their desired retirement income.
Apfa’s response to the Treasury said that addressing contribution rates will “do far more” to improve long-term savings than “tinkering”with the tax system to try and bring forward some tax revenue.
The response said: “One solution we believe might merit furtherexamination is that of auto-indexation to increase pension contributions in line with pay increases.
“We also believe that better signposting to financial advice for those who may need it, as well as providing for a regulatory environment which incentivises the provision of lower-cost advice, could be of use.”
Apfa added that it has “broad concerns” about the timing of the Treasury’s proposals as the pension freedoms are still bedding in and changes are being to the state pension and the annual and lifetime allowances.
“This has made the pensions area increasingly complex for consumers to navigate and we believe that more time should be allowed for these changes to ‘bed in’ and be understood before any further changes to the pension saving system take place.”
Chris Hannant, Apfa director general said: “Auto enrolment is going to provide a huge challenge in capacity as the volume of firms staging peaks next year.
“It took the Pensions Commission several years to conclude that auto enrolment would be the best way to get people to save. Building on this by increasing rates will do more to make people provide for the future than tinkering with the tax system.”