Removing pension tax incentives appears to be “the least worst option” for chancellor Rachel Reeves as she attempts to plug a £22bn public funding black hole.
Delegates at the Pensions and Lifetime Savings Association annual conference in Liverpool were told pension funds are likely to be the target of Reeves’s first Budget later this month.
Andrew Harrop, former general secretary of the Fabian Society, said: “Rachel Reeves has ruled out any tax rises and the bad news is that you [the pensions industry] look like the least bad space for her to go to to find money.”
Harrop said the current pensions taxation system favoured higher rate earners who were in many cases paying zero tax on their pension contributions and income. “The ‘double taxation’ argument is a myth.”
Fair taxation
The amount of tax relief paid back to savers contributing towards a pension in the last financial year was £66bn. Harrop said 19 per cent of employees who paid tax in that year were on the higher or top rate of tax and then get the equivalent of 53 per cent tax relief on their pension contributions.
He said: “Although it is a system designed to be neutral it favours people on high earnings, and if you are a centre left politician you will be asking questions about it.”
Higher earners also put more into their pensions, and are able to afford to take advantage of additional tax breaks such as salary sacrifice.
Harrop told delegates there were five principles the chancellor should consider when changing pensions taxation.
“The first was that tax relief should not hugely exceed future tax revenues, as people who benefit from higher rate tax relief while working often pay a tax at a lower rate in retirement.”
His second principle was to have tax reliefs broadly proportional to people’s earnings and pension contributions.
Thirdly, tax should incentivise and reward savers and employers.
Fourthly there needs to be fairness between age cohorts, by not asking today’s working population to pay more than previous generations.
The fifth principle was that reform should do no harm to high-quality defined benefit (DB) schemes.
Groundhog Day
Jackie Wells, an independent consultant who works with the PLSA, said discussion around the taxation of pensions felt like “Groundhog Day”.
“There are things that have stayed the same and it is evident if we are to make some fundamental changes to the way pensions are taxed then that is not going to be simple.”
Wells said there were several things the chancellor may announce later this month.
The first might be the removal of the upper rate tax relief, which Wells said could generate up to £42.5bn.
“This sounds simple for a DC scheme but less straightforward for a DB scheme.”
Other changes included the reduction of National Insurance (NI) relief on employer and employee contributions, which could save the government around £24bn.
