The pensions industry has called on the Chancellor to stay away from radical reforms in next week's Budget and instead tweak existing rules to help individuals save more.
Chancellor Rishi Sunak is expected to make a number of announcements in his Budget speech, to be delivered on Wednesday (October 27), but has been advised to tread carefully when it comes to making changes to pensions.
The industry has warned the Autumn Budget was “not the time” to tinker with big ticket items such as tax relief and the Chancellor should instead make targeted interventions on issues such as the net pay anomaly and minimum pension age.
The 'don't': Pension tax relief
Tax relief is a big concern for the industry with fears that any big changes could cause major disruption.
Currently tax relief on pension contributions is paid at the saver's marginal rate of income tax at the point of saving. Pension income is then taxed at point of withdrawal, opposite to the Isa system.
The threat of changes to pensions tax relief, such as a switch to Isa-style pensions or a flat rate for all or even a cut to high earners' relief, has been on the cards for a while but tends to resurface when Budget day nears.
Previously there have been concerns that the government was looking to cut high earner’s relief to 20 per cent or move to a 25 per cent flat rate.
Steven Cameron, pensions director at Aegon, said: “[Moving to flat rate relief] would be particularly challenging for defined benefit schemes and could mean medium to high earners including doctors in public sector schemes face big tax bills.
“It would only benefit the Exchequer if the cuts in incentives for higher rate taxpayers were greater in total than any increased incentive for basic rate taxpayers.
“There are no quick wins here for the Chancellor, change would be very complex and any savings for the Exchequer from less tax relief would take significant time to realise.”
Tom Selby, head of retirement policy at AJ Bell, also said any move to restrict tax-free cash would prove hugely unpopular.
He said there would also need to be a protection regime put in place so pension contributions already made continue to benefit from their existing tax-free cash entitlement.
Selby said: “This would deliver an unwelcome double for the Chancellor of unpopularity and complexity. What’s more, any savings to the Exchequer would potentially take years to materialise.”
1 Net pay issue
The net pay anomaly occurs in the pensions tax relief system and means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which is the case with the majority of pension funds in the market.
The Conservative Party had included the issue in its election manifesto in 2019 but so far has failed to address it with analysis from Quilter finding low earners have lost £181m in pension funds since then.