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The debate on pensions tax relief ignores the main issues

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A  couple of statistics recently caught my eye. The Office for National Statistics reported that the number of people in occupational pension schemes fell from 8.2 million in 2011 to 7.8 million in 2012 (the peak being 12.2 million in 1967). This does not include group personal pensions or stakeholder plans.

The statistics suggest that the number of people in pension schemes is at an all-time low and while auto-enrolment is now celebrating a cautiously optimistic first birthday, the next two or three years look like they will be much more challenging.

At the same time, we are all living longer and patterns of work are changing. Again, the ONS shows that in 1981 there were 2,420 people aged over 100 in England and Wales but by 2012 this figure had soared to 12,320, a fivefold increase.

Add this to the ONS figure from a few weeks ago that stated over one million people (10 per cent) are now over the age of 65 and are still in active employment.

We are living longer, patterns of work are changing and, for many, retirement aspirations are high. The baby boomer generation is nearly at its peak and the over-50s are now seen as a real economic power.  

We have just finished the party political conference season and although the Conservative conference passed without further debate about what the correct level of pensions tax relief should be, the Labour party promised it is going to announce plans for reform of pension tax relief before the next general election. 

The LibDems avoided the issue of the rate at which pension tax relief is paid but did suggest a further reduction of the lifetime allowance to help pay for their policy of further increasing the personal allowance for income tax.

The country currently provides incentives for people to save into pensions and arguably it does not seem to be working. So should we be spending such an amount, bearing in mind that those that do take advantage tend to be the better off?

This is a difficult conundrum. Relying on the state will not produce the standard of living that most people would like but will people save without incentives?

And is pension tax relief an incentive or just a way of ensuring that tax is only paid once on income, that is, an income tax deferral mechanism? Historically, the latter statement was easier to justify as there were no restrictions on contributions and we spoke about our pension system as being EET (tax-exempt on contributions, tax-exempt on investment growth and income taxed on the way out).

With the introduction of the annual allowance and the lifetime allowance, the argument that the system is a tax-deferral system is weakened as it is only tax deferral up to a certain limit and instead I think we now see the tax advantages available as being incentives to save.

So what happens if you take away or erode the incentives? Will people save voluntarily? I am sure some will but others will not see the value of deferring consumption unless there is a benefit of doing so.

This whole discussion contributes to that feeling of continual tinkering to the system, creating a totally confusing pension system, with no one knowing what they will actually get at the end.

Politics in the UK is short-term, with one party spending the money and hoping they might not have to recoup the deficit.

Surely there are some bigger questions to be answered. Yes there is an immediate cost of pension incentives but there will also be a cost to provide people with welfare benefits in the future.

Can we just stop and think about the balance between the cost today, tax paid by the wealthier pensioners and the state benefit needed to bring those without pensions to a minimum level, please?

Mike Morrison is head of platform marketing at AJ Bell

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