PensionsOct 20 2017

Pensions tax relief paper fuels Budget changes rumours

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Pensions tax relief paper fuels Budget changes rumours

An government briefing paper on pensions tax relief is fuelling rumours that the new rules will be introduced in the upcoming Budget in November.

The documents, produced by the House of Commons Library research service, provide “MPs and their staff with the impartial briefing and evidence base they need to do their work in scrutinising government, proposing legislation, and supporting constituents".

The briefing, which looks at the current debate on pension tax relief reform, said that three reform proposals stemmed from a consultation in 2015, and were supposed to be implemented in the 2016 Budget.

However, at the time, the Chancellor did not announce any fundamental change to the tax treatment of pension on the grounds that there was ‘no consensus’.

According to Steven Cameron, pensions director at Aegon, the update of this paper just before the Budget announcement sets “alarm bells ringing”.

He said: “With Brexit absorbing huge amounts of brain power across government and leaving room for little else on the legislative agenda, any attempt to introduce radical reform to pensions tax relief in the November Budget would look extremely risky.”

The first reform option mentioned in the paper is a shift to a single-rate of relief, possibly rebadged as ‘matching contributions’ from the government.

Advocates of this approach say it would improve incentives to save for low earners and could reduce Exchequer costs, the report said.

On the other hand, “there are those who argue that it would be expensive and complex to administer, unfair and inappropriately distort behaviour”.

Mr Cameron said: “Longer term, moving to a flat rate of relief for all levels of taxpayer, presented as a £1 government top up for every £2 contributed may be considered fair.

“But the practical implementation challenges are huge, particularly for defined benefit schemes which receive a major share of all tax relief.”

The second solution would be moving to a taxed-exempt-exempt system where contributions are made out of taxed incomes (and then topped-up by the government), while investment returns and any income ultimately received would be tax-free.

According to the research, advocates of this approach say it could allow individuals to better understand the benefits of contributing to a pension and make the government’s contribution more transparent.

Others argue that it would be very complex in transition, could undermine pension saving and have a negative fiscal impact.

The third and last option is retaining the current system, with some modifications, for example regarding the Lifetime Allowance and Annual Allowance.

This would have the advantage of lower implementation costs, meaning that reforms could be delivered quickly and with minimal risk.

This is the option that several pension experts believe the government will take, specifically on the annual allowance.

Mr Cameron said: “While the timing of the updated paper is worrying, it does offer a helpful reminder to MPs of just how complicated and divisive any radical reform would be.”

maria.espadinha@ft.com