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Mike Morrison: The realities of reforming pension tax relief

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The pensions world eagerly awaits next month’s Autumn Statement. Few would have predicted the events of the summer and it seems a long time since George Osborne’s consultation on pensions tax relief launched in July 2015.

We all knew the tax relief provisions would come under question at some point. It does seem wrong higher earners should get higher incentives than lower rate taxpayers.

The standard riposte has been that it is deferred tax: it is not paid on income saved but is payable when that income is paid in retirement.

Indeed, this was specified in the introduction to the consultation. But you knew there was a “but” coming. It goes on:

“With increased longevity and the changing nature of pension provision, the Government needs to make sure the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement.”

We have had discussions on exempt-exempt-taxed versus taxed-exempt-exempt, pensions versus Isas and flat rate tax relief versus no change – all of which would require significant change in habit and associated legislation.

The result? We were told there was no consensus and further work to be done. And we got the Lifetime Isa. The rest is history: Brexit is happening, the top table has changed and we are back at the starting line.

The big question now is whether new Prime Minister Theresa May and new Chancellor Philip Hammond will continue on the route started by Osborne, or whether they will want to stamp their own mark on this as they have with many other subjects.

Pension tax relief is generous, yet it is not really working as an incentive. People just do not understand it. So changing the amount or structure of tax relief is not going to help.

The fact pension legislation changes so often is the real bugbear and the main deterrent for most people. They do not like the idea of locking their money into a product where the amount they can contribute, how and when they can access it and its tax treatment can change at any time.

“Pension tax relief is generous, yet it is not really working as an incentive. People just do not understand it. So changing the amount or structure of tax relief is not going to help.”

If the rules remain un-tampered with for long period of time, people can get used to them and understanding will improve. It is the current lack of understanding, along with affordability, that stops people investing in pensions.

The big picture? Demographics are changing. We will have an ageing society with more people in receipt of a pension than paying tax to pay for it. We will have a state pension designed to be above means testing level (perhaps with or without a triple lock).

We must keep looking at this bigger picture: the cost of tax “incentives” today as opposed to the cost of “benefits” in the future. This is a great chance to start from scratch and to stamp some authority on the savings system with simplification, understanding and a long-term view.

Mike Morrison is head of platform technical at AJ Bell

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Sorry Mike, but another wholesale change in how pensions work is not going to improve matters.

    Pensions offer a very attractive means of saving for retirement and the changes of April 2015 have addressed the annuity bugbear. What pensions need now is two things.

    1.) That which you sort of highlighted, which is stability, they need the government stop changing the damn things so that people can develop some confidence in them.

    2.) The public need educating as to the benefits of the pensions.

    However neither of those address the fundamental problem which is that many people simply cannot afford to contribute anything, or enough towards their pensions, because of successive governments political posturing. Because those governments have run the country for the benefit of the top 5-10% and instituted massive amounts of policy that has widened the wealth gap. That is what’s behind the lack of GDP per head growth (productivity), despite the wealthy getting a lot more wealthy, the “poor” have gotten poorer in real terms and are now dependant even when working on “in work” benefits.

    If the government actually wants to really address the primary pensions issue, then it’s got to have policies that will raise the average workers earnings and wealth and allow them sufficient money to be able to fund their own retirement. That is the only way that the problem will truly get solved, the rest are simply sticking plasters on a festering wound.

  2. Sorry, I fail to see the implied “unfairness” that high earners get tax relief at the highest rate they pay. If anything, that’s the fairest part of the whole ever-increasing pension jigsaw. Capping off the annual allowance at £10k – now that’s unfair
    A cap on aspiration to save & provide for one’s future

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