ABI calls for pensions tax relief overhaul
23 June 2020
The Association of British Insurers (ABI) has called for an overhaul of the UK pensions tax relief system after research showed the current model favours higher earners, with lower earners and the young missing out.
A report from the Pensions Policy Institute found that basic rate taxpayers paying 20% income tax, make up 83.4% of total taxpayers, yet receive just 26% of the pensions tax relief related to defined contribution (DC) pension contributions.
While the number of people earning less than £30,000 who now qualify for tax relief has increased from 52% to 62% due to the introduction of auto-enrolment, only 24% of tax relief goes to them.
The ABI said the findings of the report also highlighted the disparity between young and older pension savers. Over two fifths (42%) of people who contribute to a defined contribution pension are under 40 but they only receive 27% of available tax relief. In contrast, people in their 40s and 50s receive two and a half times as much tax relief from the government.
Men were shown to receive the most tax relief, paying 69% of the contributions and accounting for 71% defined contribution tax relief, the ABI added.
Currently, tax relief is paid at the highest rate of income tax the pension saver pays. However, the ABI has called for a flat rate of relief to replace the current system, which it says would increase the amount of pensions tax relief for basic rate taxpayers from 26% to 42%.
According to the ABI, the findings from the report will make up part of the ABI’s wider policy work on simplifying pensions tax relief which it said has been made difficult for savers due to “years of tinkering”.
Yvonne Braun, director of long-term savings and protection, ABI (pictured), said: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”
Tim Pike, head of modelling, Pension Policy Institute, added: “While automatic enrolment has significantly increased the number of low earners benefiting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more. A change to the system of tax relief on DC pensions could offer an opportunity to address the philosophy of the current system although implementation would present challenges.”
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