The most significant point addressed in the consultation on the future of pensions tax relief, which closed last month, is that the current system is simply too complicated. Even the most astute individual will struggle to evaluate the most constructive method of saving for retirement.
The truth of any system – be that state provision, company or personal – is that the landscape pretty much never stops changing. We are asked to plan for our retirement but, regardless of the rate of tax we pay, the numbers are always moving. If our tax rate changes, so does the level of relief we receive.
The state pension is, in theory, about to become simpler. However, pensions minister Ros Altmann has had to explain many will not get anything like a single rate, which is complex enough in itself. Just to make things even more difficult, we also have the never-ending changes to the lifetime allowance and annual contribution limits.
So, what is the answer? Is there a simpler and fairer way? One of the more radical proposals is to tax pensions like Isas, which would involve moving from the current exempt-exempt-taxed model to a taxed-exempt-exempt one. But transparency and consistency are key. The only way to ensure some certainty for savers is in the form of what they are given at the point of contribution.
A promise of something at retirement is the one thing consumers will not have faith in. With the potential change of government every five years, younger savers in particular need an “at point of contribution” incentive. Why would they lock money away for no immediate incentive and the promise of something decades away that may not exist when they get there?
There are two potential solutions the Treasury could introduce to simplify the process, as well as retain the incentive to save into a pension.
The first is a single level of tax relief. A rate in the region of 30 per cent, which has been discussed by many as a fixed rate of government contribution, has to be seen as a huge positive from both an administrative perspective, as well as from a marketing perspective in helping take this level of incentive seriously.
The other option would be to completely remove the lifetime allowance and to have an annual contribution limit that will attract the Government contribution. If you exceed this limit, you can still fund to a higher level but you will not receive further contribution from the government in that tax year on the excess. Those funds can still grow within the tax efficient environment of the pension, however.
Ultimately, whether the Treasury likes it or not you cannot expect individuals to save for their retirement if there is no incentive to do so, and that will come at a price. However, if that price is an ongoing reduction in the benefit burden supporting pensioners with low incomes, the maths cannot be too difficult to do.
I hope responses to the consultation have focused on keeping tax relief simple and transparent, as well as proving that paying into something that locks money away for many years is a good thing. The only way to achieve that is through a simple, financially robust system with a clear incentive to save in a way that is stable and tax-efficient.
The Treasury has a great opportunity to keep those with pensions already onside and even more incentivised, as well as encourage those who are disenfranchised to engage with retirement planning. In the end, this can only be good for the UK population, the Government and for those providing the advice.
Dean Mirfin is technical director at Key Retirement