Chancellor’s pension contribution tax raid would be ‘a step too far’

11 February 2020

Defined benefit scheme issues

However, the biggest problem facing a pension tax relief cut would be the treatment of defined benefit schemes.

Cameron said: “While there are now very few of these schemes ‘open’ in the private sector, they remain common in the public sector and attract a high proportion of overall pension tax relief. This means it would be hugely divisive to reform defined contribution scheme treatment but leave the system for defined benefit schemes unchanged.

“But in defined benefit schemes, while employee contributions are fixed, contributions from employers change over time to deliver promised benefits and are not ‘earmarked’ for individuals. Looking at the overall funding of such schemes, if tax relief across all employee contributions fell, the employer would be left having to pay more to compensate. Much detailed thinking is needed to decide how to make flat rate relief work for members and employers with defined benefit schemes.”

Pensions rules simplification

Tom Selby, senior analyst, AJ Bell, agreed any reform made to the pension tax framework would need to avoid harming the “fragile savings culture” that is being developed in the UK. Instead, Selby argues the focus should be upon improving the existing system, starting with reducing the complexities of the annual allowance by moving to a single allowance.

Selby commented: “There should then be an evaluation of whether the annual allowance is an appropriate mechanism for controlling defined benefit pension costs given the problems it has caused NHS workers in particular.

“One option worth considering, and flagged previously by the Office of Tax Simplification, would be to control DC pensions with a single annual allowance and DB with a lifetime allowance. This would radically simplify the rules and remove the unfair punishment against strong investment performance causes by the lifetime allowance in DC pensions.”

He added: “Beyond this, there now needs to be an acknowledgement that the lack of clarity about the future of pension tax relief – and the rumour and speculation this causes – needs to be addressed. Savers should be confident the product they commit their hard-earned cash to for decades won’t be subject to constant change. If there is to be further reform to pensions taxation, we urge the Government to take a genuinely long-term approach by committing not to make further changes for at least 10 years.”

Greg Kingston, group communications director at Curtis Banks, added that while some reform is required with regards to the pension tax taper, MPAA and lifetime allowance, “pension tax relief helps drive desired outcomes for workers and encourages saving for retirement”. He said Curtis Banks believed scrapping pension tax relief would create “bad outcomes” for both workers and society as a whole should greater reliance be placed upon State benefits for higher proportions of tomorrow’s pensioners.

“Pension tax relief is a vital part of the pension system and must be protected. It encourages workers to save more for their retirement and is an investment in lower State intervention and support later in their future retirement. As HMRC has pointed out, the future net cost of pension tax relief is already expected to be lower, without it being scrapped altogether or lowered.”

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