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MPs urge Hammond to overhaul pension tax relief

UK-London-Westminster-Big-Ben-Bus-480.jpgThe government has received renewed calls to encourage greater saving through introducing a flat rate of pension tax relief.

In a report from the Treasury select committee on household savings, MPs say the government should give “serious consideration” not just to a flat rate of pension tax relief, but also promote greater understanding that it operates as a bonus or additional contribution.

The report also suggests the government should think about whether or not to scrap the lifetime allowance and replace it with a lower annual allowance.

AJ Bell personal finance analyst Laura Suter says: “Scrapping the lifetime allowance for pensions and controlling tax relief through the annual allowance would be a welcome development and stop people worrying about good investment returns resulting in a tax hit.”

“If a flat rate of tax relief encouraged more pension savings it would be a positive outcome, but the report also concludes that tax relief does not work as an effective incentive to saving, so it’s hard to see how it would make a significant difference. Before such a radical overhaul to the system we would want to see evidence that it would achieve the goal of getting more people saving for their retirement.”

The report also proposes getting rid of the Lifetime Isa altogether.

The MPs say: “This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”

Zurich head of retail platform strategy Alistair Wilson says: “This could be the death knell for the Lifetime Isa.  Although it was well intentioned, many providers appear to have been turned off by a savings vehicle that has the complexity of a pension, but with fewer benefits for consumers.”

The report also calls on the FCA to reconsider whether savers should be forced to take guidance before accessing their pensions.


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Any change of this type is likely to be used by the treasury for short term additional income rather than making positive contributions to retirement planning for the lower earners which is a shame. My feeling is the flat rate would be likely to be closer to the basic level of relief than anything else so offering v little additional assistance. However no one has explained how salary sacrifice and employer payments would be dealt with (likely to be horribly complex to deal with in order to stop “abuse”).

    The main reasons higher earners receive most of the tax relief are obvious:
    1. They pay the most tax so will receive the most benefit.
    2. Lower earners can’t afford to pay much so receive very little.
    3. They have the most disposable income after basic living costs so can allocate this to pensions.

    In addition within the tax relief figures are (in many cases v substantial)payments by companies to fund DB deficits. This brings down the tax take but is overall a sensible thing.

  2. Julian Stevens 26th July 2018 at 1:22 pm

    Can there be any realistic expectation of overhaul and, most importantly, simplification of a system that’s been relentlessly tinkered and meddled with by successive governments for the past 30 years? The worst lurch of all occurred on 5th April 2006 under Gordon Broon and since then things have only got worse.

  3. The effects of reductions in the annual allowance, Lifetime Allowance, and Tapered Annual Allowance have combined to drastically reduce the amount of tax relief given to higher earners.
    When the ratcheting-up of AE contribution rates and greater coverage is added to the mix, we will soon be in a position where the greater amount of tax relief goes to basic-rate taxpayers.
    This means that once the Govt introduces a flat-rate of tax relief, say at 30%, and realises this has INCREASED the tax relief bill, subsequent Chancellors will reduce the rate in order to save money, until within 5-10 years we end up with only basic-rate tax relief.
    Campaigners for a flat-rate tax relief system need to be very careful what they wish for!

  4. More fiddling while pensions burn. Odd isn’t it that before all this meddling pension savings (of all types) seemed to do much better than now.

  5. John Hutton-Attenborough 1st August 2018 at 10:28 am

    Where is the evidence that a flat rate of relief will encourage greater savings. If it proves to actually reduce savings how can this be considered a success?

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