Inequalities in pension tax relief system should be looked at, says ABI

Pension tax relief worsens existing inequalities and could be simplified to make it fairer, the Association of British Insurers (ABI) has suggested.

The current system particularly benefits higher earners and is less favourable towards women, the lower paid and younger workers, the ABI said.

Tax relief is effectively a “bonus” which tops up people’s pension savings, alongside their own contributions and those of their employers.

Money that would have gone to the state in the form of tax is funnelled into pension pots, where it grows over time. Pension savings can be taxed when the saver eventually starts withdrawing the money.

The more people earn, the higher the percentage rate at which their income is taxed. This means that paying into a pension and getting the tax relief that comes with it can be particularly advantageous for higher earners – many of whom are older males.

The ABI commissioned a report from the Pensions Policy Institute (PPI) into the issue.

The report said the skew towards people on higher incomes is magnified because, as well as being entitled to a higher rate of relief, they are also likely to have more cash available to put in their pension than lower earners.

It said people paying basic rate tax make up 83.4% of total taxpayers but only receive 26% of the pensions tax relief related to defined contribution (DC) pension contributions.

The research found the system favours higher earners. The number of people earning less than £30,000 who now qualify for tax relief has increased from 52% to 62% due to automatic enrolment into workplace pensions. But only 24% of tax relief goes to them.

Meanwhile, 42% of people who contribute to a DC pension are under 40, but they only receive 27% of tax relief.

Some 71% of DC pension tax relief goes to men.

Tim Pike, head of modelling at the PPI, said: “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.”

The ABI said a change to the system is needed so it is simpler, fairer to all earners and encourages saving for retirement.

The PPI’s research suggests that changing the pension tax relief system to a single “flat rate” could help distribute tax relief more evenly.

But it also cautioned that introducing different tax relief regimes would need careful consideration as there could be unintended consequences.

Yvonne Braun, director of long-term savings and protection at the ABI, 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.”

Helen Morrissey, pension specialist at Royal London, said: “Years of constant tinkering have left the pension tax relief regime in a real mess with many hidden pitfalls…

“If we want to develop a fairer pension tax relief system then what we really need is wholesale reform.”

Gregg McClymont, director of policy at The People’s Pension, said: “This proposal would be broadly revenue-neutral for the Treasury and would be best considered by a new independent Pensions Commission as part of its remit.

“Pensions tax relief is notoriously complex and must be simplified and made fairer.”

Read Full Story Click here to comment

FROM OUR PARTNERS