TaxJun 23 2020

ABI revives call for flat rate pension tax relief

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ABI revives call for flat rate pension tax relief

The Association of British Insurers (ABI) has urged the government to simplify the pension tax relief system, arguing it worsened existing inequalities in its current form.

ABI commissioned research, published this morning (June 23), found the current system benefitted higher earners in particular and was less favourable towards women, the lower paid and younger workers.

When paying into a pension savers receive tax relief on any contributions they make and under the current system tax relief is paid at the highest rate of income tax any saver pays.

According to the research, carried out by the Pensions Policy Institute (PPI), basic rate taxpayers paying 20 per cent in income tax make up 83.4 per cent of total taxpayers but only receive 26 per cent of the pensions tax relief related to defined contribution pensions.

It also found the number of people earning less than £30,000, who qualify for tax relief, increased from 52 percent to 62 percent due to automatic enrolment. However, only 24 percent of tax relief goes to them.

As well as being entitled to a higher rate of relief, higher earners are likely to have more cash available to put into their pension than lower earners, further highlighting the skew towards this group of savers, the research stated.

Furthermore, the system is biased when it comes to age, as almost half (42 per cent) of people who contribute to a DC pension are under 40, but they only receive 27 per cent of the available tax relief.

People in their 40s and 50s receive two and a half times as much tax relief from the government.

Meanwhile, 71 per cent of DC pension tax relief goes to men as they pay 69 per cent of the contributions, further highlighting the ongoing gender pensions gap.

The PPI and ABI suggested making a small change to the system could help solve these inequalities.

The organisations suggested changing the current system to a single flat rate of relief would increase the amount of pensions tax relief for the basic rate taxpayer from 26 per cent to a more equal 42 per cent.

Yvonne Braun, director of long-term savings and protection at the ABI, said a change to the system was needed to make it simpler and fairer to all earners and encourage saving for retirement.

She said: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.

“We hope the research will provide food for thought on how to make the system simpler and fairer.”

But Andrew Tully, technical director at Canada Life, warned any changes to the system must be well thought out and should also cover defined benefit pension savers.

Mr Tully said: “We must learn the lessons of the past and not make any kneejerk changes. There are a number of difficulties in implementing changes as we have different systems of giving tax relief.  

“The vast majority of tax relief is given to DB schemes so any changes need to cover both DB and DC. Making changes in the DC market only is simply playing around the edges.”

He added: “There is a huge amount of complexity in the tax system, with all of the various allowances, so any changes need to simplify matters to help people better understand the benefits of saving using pensions as the vehicle.”

The government had already debated a makeover of the pension tax relief system in 2015, when the idea of a flat rate was floated.

But in 2016 then-chancellor George Osborne dropped plans to either scrap upfront relief in favour of a ‘Pension Isa’ with tax-free withdrawals from aged 55, or introduce a flat rate, which would have benefited lower earners and hit the wealthier core of Tory voters.

Lesley Carline, president of the Pensions Management Institute, said there were other issues in the pension system that could be addressed to solve inequalities, such as the net pay anomaly.

Ms Carline said: “Amending the rate of tax relief is all very well, but the rate itself is just one inequality and fairness requires us to address them all. 

“Firstly, there is the relevance of tax relief to members of DB schemes since there is no direct correlation between contribution rates and benefit accrual. 

“Secondly, and probably the most pressing at the moment, is the anomaly between the net pay arrangement and relief-at-source for DC members who are low earners.”

amy.austin@ft.com

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