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Pension reforms risk undermining ‘hard-won’ pensions confidence

25 February 2021

The Pensions & Lifetime Savings Association (PLSA) has warned that potential pension reforms risk undermining confidence in pensions and could leave many people with lower pension savings.   

In a new report, The Five Principles for Pension Taxationthe industry body set out its five principles upon which pension taxation should be based. According to the principles, any change should provide financial support while incentivising saving for retirement and help savers to make the right decisions about retirement saving.

In addition, reforms should be fair, meeting the needs of everyone from employed and self-employed to non-workers, and simple to adopt and administer to avoid unreasonable costs for both employers and schemes.

Finally, the PLSA says reform should be designed to avoid repeated change and build confidence in long-term saving.

The PLSA’s report comes amid growing speculation that the Government may look to make changes to the current pension tax system to balance its books in the wake of the pandemic.

Touted changes range from removing higher rate income tax relief or reducing the annual or lifetime allowance all the way to introducing a flat rate of tax relief for all savers or  total overhaul of the system so that all pension contributions are taxed at an individual’s full marginal income tax rate upfront.

The final suggestion could be particularly harmful to consumers, according to the PLSA, as it would result in lower pension saving for all income groups, result in less money for the Exchequer in the future as society ages and remove  the incentive for people to lock away their money until later in life.

The PLSA also warns that the removal of a higher rate tax relief, while saving the Exchequer money, would not improve pension adequacy for people who pay the basic rate of income tax as it would  involve no change for them. Meanwhile, a move to a single flat rate of pension relief would have “very substantial implications” for occupational pensions, resulting in much higher costs for employers and schemes and would take at least two or three years to implement.

Nigel Peaple, director of policy and advocacy, PLSA, said: “More, not less, pension saving is needed so that everyone will have an adequate income in retirement. 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. The Five Principles for Pension Taxation can help government make the right decisions.

“Our assessment suggests that no single reform or the current system is perfect. Most reform options leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes. Introducing major change to the system of fiscal support for pensions risks undermining hard-won confidence in pensions. This, in turn, could undermine the gains made in recent years, particularly through the advent of automatic enrolment and improvements in governance.”

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