Budget  

Budget pension tax relief shake-up looks unlikely

Obstacle two – this couldn't be done overnight and therefore flat-rate would take a while to introduce and would be administratively burdensome. 

DB accrual

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If the scheme is a defined benefit (DB) scheme – the employer has promised to pay benefits and money is fungible.

Therefore is the contribution they are putting in paying for: my benefit, my colleagues' benefit or paying someone's pension?

Therefore, you need to value the DB accrual in order to tax it. There is the added complication that a lot of the DB accrual is in public sector schemes.

Obstacle three – this will either result in an effective pay cut for higher earning public servants, or recycling of some of the saving into higher pay to compensate for the higher tax. 

Net pay arrangements

For all occupational schemes except Nest, employee pension contributions are included in the National Insurance calculation but are then deducted in determining taxable pay.

This delivers marginal rate relief. It’s brilliantly simple and has been around since the 1940s.

Obstacle four – changing this would increase administration and would require some people to have to reclaim. 

Obstacle five – if you remove marginal rate relief on employer and employee contributions and don’t change the net pay arrangements, there will be some people who have received the wrong relief and once their final marginal rate is determined there will need to be a reconciliation. 

So there is the rub. There is no consensus because it is complicated to apply consistently, difficult to implement quickly and there is no evidence that it would increase pension savings. 

Politically, that is not very attractive.

The government needs cash now to pay for spending pledges and that is why the direction of travel appears to be to choke off the pension contributions of high earners.

Let's see what today's (29 October) Budget brings.

Peter Hopkins is technical director at AJ Bell 

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