The Society of Pension Professionals has come out against changes to pensions tax relief, saying a flat rate would not benefit the exchequer nearly as much as proponents claim. Does the industry agree? 

 

The rumour mill started early this year. Although nobody remembers whether the Treasury’s next announcement will be a Budget, a statement or an ‘economy plan’ - the chancellor was due to deliver an autumn Budget in 2020, but this only took place in March this year because of the pandemic – speculation is rife that the amount of Covid-related debt loaded onto the nation would force the government to look for any option to refill its coffers. 

 

Fears that it could lay its hands on pensions have haunted the industry for years and were reignited by a recent Telegraph article.  

   

   

Among others, it said the Treasury was contemplating replacing the current system of marginal rate tax relief with a flat rate approach, making pension saving more worthwhile for lower-rate taxpayers and less attractive for higher-rate taxpayers. Proponents argue that this system would be fairer and frequently point to the billions the Treasury foregoes each year through pensions tax relief. 

 

However, these figures are misleading, says the SPP in a new “myth-busting” paper. While the gross cost of pension tax relief quoted by HMRC for 2017/18 was £37.2bn, “most of this relates to employer contributions to DB schemes, including a significant amount of deficit repair contributions” for historic service, the SPP says.  

 

The figure for individual member contributions to DB and DC schemes, including contributions to personal pensions and payments by the self-employed, is just £6.3bn, the Society points out. 

 

It also says that the true cost of tax relief “is significantly less than the amounts often quoted”, as the net cost of £19bn for 2017/18 “is arrived at by simply deducting income tax on pensions currently payable”.

 

The SPP argues that using the current amount of tax received to net off against total costs is not a like for like comparison and overstates the true cost of tax relief: “These pensions relate to an entirely different cohort of individuals, and the tax payable on these pensions bears no relation to the reliefs currently being provided. The income tax eventually paid by the cohort currently receiving relief is likely to be far greater, due to the higher value of the pensions in payment and the increased number of individuals receiving taxable pension benefits.” 

 

It also claims that a flat rate of relief would not only be “difficult to apply” but have a “significant risk of unintended consequences” for DB members, such as penal taxation similar to that experienced by high-earning NHS staff. 

 

 

The Treasury Committee recently demanded urgent reform to pension taxation, but the Treasury remained non-committal in its response published in early June. It referred to its 2015 consultation on pensions tax which “indicated no clear consensus for reform” and said a balance needed to be struck between encouraging the majority to save and targeting support to those who most need it. 

 

"Altering this balance could have profound and far-reaching impacts, and so while all tax reliefs are kept under review, more radical changes to pensions tax relief would require careful consideration,” it concluded. 

 

 

Ian Neale, director of policy specialists Aries Insight, which is a member of the SPP, said the Society was right to draw attention to “the misleading ways in which the figures for pension tax relief are sometimes presented, especially by advocates of radical reform”.  

 

He said he had seen wildly exaggerated figures cited as the cost of pension tax relief, as much as £50bn, without any reference to the data provided by HM Revenue & Customs.   

 

“Some commentators appear to give the false impression that the bulk of income tax relief on pension contributions goes to the individual, whereas in fact the latest published figures for 2017/8 show that more than 60% was given for employer contributions,” he noted. 

 

Removing tax relief on employer contributions – taxing employer contributions was also up for debate according to the recent Telegraph article – might benefit the exchequer, but doing so would have a significant impact on profit and indirectly on dividends and their share price, Neale argued, “so politically it would be difficult to implement”. 

 

However, he sees some scope for traction in deficit reduction contributions made by employers, saying that altering funding rules – considered overly prudent by some – meant reducing deficits, which in turn means employers would have to pay less to plug them and consequently receive less tax relief. 

 

 

The Pensions and Lifetime Savings Association is also against the introduction of a flat rate, although it admits that the current system is not perfect.

 

“Most reform options leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes,” said Nigel Peaple, director of policy and advocacy. 

Removing higher rate tax relief would also not improve pension adequacy for people who pay the basic rate of income tax as it would involve no change for them, Peaple argued; any increase would be marginal for lower rate taxpayers, the PLSA's calculations suggest. 

 

The PLSA estimates that 3m to 4m higher-rate taxpayers would have to pay £2,000 or more in tax per year if the system was changed, which might help the exchequer save between £8bn and £10bn per year. 

  

“We recognise that the UK is facing a very severe economic and fiscal environment as a result of the pandemic; but any potential reforms should be fully thought-through and assessed,” said Peaple. "More, not less, pension saving is needed so that everyone will have an adequate income in retirement.” 

 

 

The SPP, as well as head of technical, research and policy at Dalriada Trustees, John Wilson, pointed out that tax relief is often merely deferred tax, as tax falls due on pensions at the withdrawal stage.  

 

He also argued that it is not just lower earners who are saving insufficiently for retirement. Investment platform Hargreaves Lansdown recently published figures showing that higher rate and additional rate taxpayers are more likely to be in the red for at least half the month. The rate of tax paid also does not necessarily indicate quality of life, which is dependent on the cost of living; the figures show Londoners are most likely to be in debt. 

 

Wilson argued that pensions must not been seen as a soft target recouping public spending from the pandemic. "If change is needed it must be the right reforms for the right reasons,” he said. 

However, he does not see a change in tax relief anytime soon. “My view is that it is just one of many issues being discussed and is likely to be discounted in favour of other options.”

 

Tim Gosling

John Wilson

Ian Neale

Nigel Peaple