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Blessed relief

B&CE deputy chief executive John Jory has called on the Government to bring in a 30 per cent flat rate of tax relief on pension contributions.

At a fringe event co-hosted by B&CE at this week’s Labour Party conference in Brighton, Jory also demanded the state pension age be raised to 75 or 80, which would allow the Government to offer a much higher state pension to elderly Brits.

Jory said: “We would not have open-ended annuities, we would know we had to provide for ourselves until a specific age and then the state would kick in.”

This was a view echoed in a report published recently by the Centre for Policy Studies.

He also called for an independent pensions commission to focus on long-term strategy, similar to the Monetary Policy Committee.

Anyway, back to a flat rate of tax relief. Jory said a flat rate of tax relief on pension contributions of 30 per cent for all levels of income would encourage low to moderate earners to save for their retirement.

He said: “Far too much tax relief goes to far too few people. I believe that a 30 per cent rate of relief would act as a far greater incentive for low earners to save.”

How a 30 per cent rate of tax relief would work in practice is another matter and one that Jory did not address in the brief meeting.

Hargreaves Lansdown pensions analyst Laith Khalaf says HM Revenue & Customs would effectively have to top up the pensions of basic rate taxpayers from its own coffers.

But the money saved through stripping higher rate taxpayers of 10 per cent of the relief they currently receive on contributions would help cover the cost of boosting the pensions of low earners.

Khalaf says HMRC may introduce a cap on relief, whereby if a person for example earns £10,000 and pays tax of £2,000 they will only get 30 per cent tax relief up to the amount of tax they have actually paid.

This is a method currently used with some investment products.

He says: “Implementing a 30 per cent flat rate of tax relief would require a substantial redesign of occupational schemes, which already factor in the tax rate the individual has paid. The flat rare could either work on the basis that tax relief is simply paid on 30 per cent of contributions, whereby higher rate taxpayers would then subsidise basic rate.

“Or the 30 per cent could be capped at the maximum amount of tax the individual has paid. For basic rate taxpayers and some higher rate taxpayers this would then mean being unable to contribute 100 per cent of earnings and get tax relief.

“As for whether it is fair to equalise tax relief, I would simply point out one obvious fact that often escapes attention: higher rate taxpayers get a better pension deal but they do pay more tax.

“The pension system is not inherently unfair, it is simply a mirror image of the income tax system, which by the same measure is unfair. Those earning over £150,000 receive about a quarter of pensions tax relief or so the Treasury says, a lesser known or glossed over fact is that they pay about a quarter of the income tax take.

“One advantage of applying a flat rate of 30 per cent is that by divorcing pension tax relief from the income tax rates, we could have a stable and unchanging axle in the pensions wheel. You could go further and remove pension income from the income tax system, and apply a flat rate tax rather than income tax rates. The result would be a saving equation that does not change every time the Treasury tinkers with income tax rates.”

What is your view? Would 30 per cent tax relief be workable? Is it fairer? Would it actually work in encouraging those on lower incomes to save more for retirement?

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There are 9 comments at the moment, we would love to hear your opinion too.

  1. variable retirement ages
    why not have variable retirement ages, in much the same way as many old pension contracts did ? Starting at age 65 with a higher figure for each older age. This would provide and incentive to save and yet ensure that the very old and poor were well provided for.

  2. Tax relief isn’t the issue
    This proposal is effectively to bribe people with more relief than the tax they would pay on the money if they kept and spent it. I don’t see it as workable, not least because the reasons people are becoming increasingly averse to the very idea of putting money into pension plans has nothing to do with tax relief. The big issues are a frighteningly complex framework of rules, the annuity trap and the lack of inheritability of unspent funds in retirement. Somebody convince me I’m wrong and I’ll stop going on about it. But so far nobody has.

  3. can’t live long enough
    At present a basic rate tax payer with no employer contribution can not expect to live long enough to make pension contribution worthwhile. 30% would tilt the balance to a degree but would still leave ISA and UT as my preferred option.

  4. 30% tax relief
    How do they think these ridiculous ideas up. This would have no effect of increasing saving for the lower earners, but would have the effect of stopping pension savings for the higher rate of tax payers, where would the incentive be. Tax relief is given at source as the benefits are taxed on retirement. The government have already started to make people nervous regarding pension savings following their shock introduction on the highest paid, this sort of commentry will only put people off further.

  5. Philip Stevenson 1st October 2009 at 4:06 pm

    Will it work?
    I’ve always believed that a more redistributive method of tax relief on pension contributions would be welcome. However there seems to be a presumption that 30 per cent relief would level the playing field. Bearing in mind the economic position we are in it would be more advantageous to find out what the ‘tax neutral ‘figure would be and set relief at that figure and possibly review it every few years so that there is no further drain on the public finances. Secondly fixed term annuities to a specified age, be that 78/80 or whatever would present all the inherent problems that low annuity rates currently do and ‘gaining’ value for money from pension savings.

  6. Mike Jones, 1st October 2009 at 4:57 pm

    It’s about pension education and enlightenment
    If there’s one topic guaranteed to start a lively argument, it’s the subject of pensions. I remember an evening earlier this year when after a tough couple of games of squash, I returned to the pub with two of my fellow competitors, both serving police officers. We were shortly joined by another serving officer, and in next-to-no-time the conversation turned to retirement. One of the officers retires at age 52 in a few months time; the other at just under age 52 in five years time; and the third has 12 years until she could take her pension at around the same age. To them, their pension and the ability to take it so early after full service entitlement was key to them having stayed in the job. They fully grasped that their 11% employee contribution was well worth the price to achieve the goal of retirement with excellent pension benefits. The value that they placed on their final salary pension scheme couldn’t be understated. I have to admit that I was rather envious of them. Perhaps if we had a debate about a nationalised defined benefit pension scheme with, dare I say a decent level of compulsory employee contributions, we could engender the same desire for retirement planning as my fellow squash players have about theirs.

  7. Blessed Relief
    Jory is a twit – is the idea that people will starve to death between stopping work and being able to claim their State pension. In other words, the State doesn’t want to pay a pension except to the minority that survive – they will be all the people in public sector jobs who can afford to live well from when they stop work at age 60 and reaching 75. Of course, this includes the policticians.

  8. Winners and losers
    If saving in to a pension is viewd as just deferred income, hence tax relief at source at the rate you would otehrwise pay to have it in your pocket and then taxed at the rate of pension when you take it, for me that is fair. It does not then penalise those who have very short high working income and then back down to very modest, so for me the 30% falt rate is morally corrupt.
    Increasing state pension age masively and making state pension ncome much higher from that later date and allowing an individual to spend ALL their personal pension pot (after taxing it as income) between their actual retirement date and the later state date sounds a good idea to me.
    The problem is we do not live in Utopia and we all know that if that were to be proposed then as Golden Brun has done before, some robber Govt will come along and think “Oh I can fund lost of things with this pension money and people will not notice for long enough for me to become prime minister and walk away leaving someone else to sort out my mess, but at least I’ll be in Who’s who as an ex prime minister, even if the most disliked!”……I originally put hated, but Maggie probably had the most who hated her (I didn’t), but there are probably more on both sides of the commons who dislike GB than ever hated Maggie!!

  9. But How Could it Work ?
    I do wish commentators would engage brains before putting mouths ( or pens) into gear.

    How would this deal with those on non contributory schemes and those who would move to “non-contributory” salary or bonus sacrifice arrangements ? As far as I can see Directors can decide to vote themselves pension contributions instead of divis or bonuses and as long as the bonuses were not contractual, this is not even a waiver. Those with most to gain from bonus waiver are possibly those who pay 40% tax on pay and cars as well as 11% NI; not the high paid by any means.

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