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Friends Life backs Steve Webb’s pension tax relief reform plan

Pension savers should be incentivised with a ’buy two, get one free’ deal on pensions tax relief, Friends Life says.

Pensions minister Steve Webb has proposed a flat 33 per cent rate on pension contributions as well as doing away with the £1.25m lifetime allowance.

Tax relief is almost certain to be in the sights of whichever Government emerges following the May general election.

Friends Life is in favour of the 33 per cent flat rate and also wants to push employees’ minimum auto-enrolment contributions up to 6 per cent by 2019. Under current plans, employees are due to contribute 4 per cent of their salary to their pension by 2018.

The insurer says employers’ contributions should remain tax-free and the annual allowance should be used as a “lever” to control future spending on tax relief. It adds that controls should be introduced to stop higher and additional rate taxpayers benefiting “unfairly” from salary sacrifice.

Friends Life group chief executive Andy Briggs says: “Currently, higher and additional rate tax payers make half of the pension contributions but benefit from 75 per cent of the tax relief. That has to change, to increase the pension savings of those that need it most.

“The principle behind the current system of pension tax relief is that tax is paid in retirement at the same rate as the tax relief given on contributions. But that is a myth, as only a small proportion of people continue to pay higher rate tax once they retire. Our proposal recognises that tax relief is simply the government’s contribution to people’s pension savings and says it should be given on equal terms to all.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. whilst a member of a DB scheme or decent DC scheme totally funded by employer or with high employer contributions continues to, effectively receive high rate relief through the back door.

    I am not adverse to a flat rate but solve that issue first. Not once have I seen a comment from a minister who advocates this change explaining how they will deal with that…….when your own pension is probably non-contrib DB perhaps that is why……?!

    second problem is as soon as you bring it away from what you pay as income tax, it becomes a potential target for any government to mess about/ raid in the future….disaster!

  2. I wonder if Steve Webb has spoken to employers about the likely stickability of employees in auto-enrolment pensions as the contribution percentages increase. Only today, a client told me that he expected most of his employees to opt out either at the beginning or over the next couple of years and the percentage increases. So, increasing their contribution to 6% should be like urinating in the wind. The contribution will need to be made compulsory.

    As to the 33% relief, it is no surprise to see the government seeing tax relief as a ‘government contribution’

  3. The problem with a rate of tax relief out of line with tax rates is how do you monitor it?

    There are non contributory DB schemes, contributory DB schemes, salary sacrifice etc, systems have to be developed to calculate the benefit for higher rate taxpayers getting relief at source, more cost at a time when pension savings are to be encouraged. Basic rate taxpayers using salary sacrifice will have to be given extra relief for example, although technically they do not make a contribution.

    The system will have to be fair for all and easy to administer, not sure that is possible. Millions of people may end up having to do tax returns who do not at present with the basic rate at source system. Hopefully there are payroll systems out there that can cope with the proposals.

  4. Currently, higher and additional rate tax payers make half of the pension contributions but benefit from 75 per cent of the tax relief.

    That’s because they pay the tax in the first place.

    I am not sure that reducing the tax relief for one segment of society and increasing it for another will actually increase pension saving at the lower end.

    The ideas proposed, changes to tax relief and increased minimum contributions, depend on factor alone which is affordability that those in well paid jobs proposing them conveniently forget.

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