Pensions tax relief: Call on the government ahead of the Autumn Budget
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The Autumn Budget is set to be announced this week, and it has been rumoured for months that the government would like to cut pensions tax relief to meet the costs of building back better post-pandemic. What would the consequences be for pension saving if this did happen and what are the different ways the government could raise £5bn per year?
At the PLSA Annual Conference earlier this month, a set of five principles were listed which the PLSA believes the government should consider if they choose to undertake a reform of pensions tax relief. The principles are: promoting adequacy, encouraging the right behaviours, fair – helps everyone, simple to adopt & administer, and enduring & sustainable – designed to avoid repeated change and so builds confidence in long-term saving.
Laura Myers, head of DC at LCP, says pensions tax relief is one of the key pillars of automatic enrolment: “It helps people build their retirement savings and in effect it makes it financially rewarding to do the right thing. I think we all would agree that people aren’t really saving enough to have an adequate income in retirement. So really it’s essential that any changes that we’re putting forward in tax relief make that situation better not worse.”
Suggestions and recommendations
With that in mind, guest speakers at the PLSA Annual Conference set out some of their suggestions on where this £5bn could come from and changes to the pensions tax regime.
Carl Emmerson, deputy director of the IFS, said that the Treasury “missed a trick” when it announced the social care levy: “It really is not clear to me why the new social care levy should not be levied on pension income as well as earned income and dividend income.”
He also touched on inheritance tax, saying that it is incentivising pension pots to be used as an inheritance vehicle rather than a retirement savings vehicle. “I’m really not clear why the policy rational is pushing that direction,” he says. “I think this is a particularly important one to fix soon, the longer you leave it in place, the longer people legitimately will say: ‘Well I put money in my pension with the expectation that I would use that to give money to my heirs’.”
Chris Curry, director of the Pensions Policy Institute, also shared his thoughts, encouraging the government to ask themselves: Would you want to raise this just from pensions?
“Pensions are all about balance and trade off… there’s always winners and there’s always losers. But in my mind, if you’re trying to take £5bn from a system it’s hard to create winners,” he said. “I think there’s a lot of discussion that needs to be had to ask what is it that you’re trying to achieve by taking £5bn out of the system?”
Curry called on the government to consider not just taking money out of the pensions system but also looking at what it is we want the pension system to achieve.
It is not expected that we will see radical change in the area of pensions tax right now, but the PLSA called for the government to ask themselves: Who will pay for the changes that they do make?
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