Whilst findings around the impact of the current system on UK savers, and the advantage given to higher earners, were welcomed by the industry, some have warned that specific recommendations for a flat rate of tax relief require careful consideration and could risk unintended consequences.
The People’s Pension director of policy, Gregg McClymont, emphasised that it has "long been known" that higher rate earners benefit disproportionately from pensions tax relief, describing pensions tax relief as "notoriously complex".
"Targeting a lower, flat rate of 30 per cent would be much fairer and would help lower earners boost their retirement savings," he added.
McClymont argued that this would be "broadly revenue neutral for the Treasury", highlighting it as an area that may fall under the remit of a pension commission, which the Department for Work and Pensions recently confirmed was still a likelihood going forward.
Echoing this, Phoenix Group head of proposition, Neil Hugh, stated that changes over the years had made the tax system "very complex for savers".
He added: "It is clear that reform is needed, but this must be done in full consultation with our industry and across both the defined benefit (DB) and defined contribution (DC) pension system arrangements in order to make things simpler for savers.
"At a time when millions of people are now more successfully saving through automatic enrolment, it’s crucial that any reform continues to reward savers for doing the right thing and putting money aside for their futures.”
Many industry experts have emphasised the need to ensure any alternative approaches are considered carefully, requiring careful planning and cross-party consensus.
Society of Pension Professionals president, James Riley, explained: “We need to ensure that we end up with a robust pensions tax system that is fit for the long term (and isn’t constantly tinkered with, as has been the case in the recent past). But we also need a system that is truly simple.
“Any changes to the pensions tax system needs to maintain the amount of relief available to savers as a whole."
He added: “Any tax grab, however attractive given the county’s current finances, will simply exacerbate the already huge inequality between current pensioners and those now saving for retirement.”
Canada Life technical director Andrew Tully, echoed this, stressing the need to “learn the lessons of the past and not make any knee-jerk reactions".
In particular, Tully highlighted issues around the tax system in relation to DB pension schemes, which the report highlighted would inevitably be impacted by any changes.
Tully explained: "There are a number of difficulties in implementing changes as we have different systems of giving tax relief.
“The vast majority of tax relief is given to DB schemes so any changes need to cover both DB & DC. Making changes in the DC market only is simply playing around the edges."
Quilter head of retirement policy, Jon Greer, also described the recommendations as a “radical proposal” requiring careful consideration, warning that further challenges could come up further down the road.
He stated: “We cannot have an overhaul of the pension tax system only to find it flawed and altered when challenges present themselves."
He warned that it is a “slippery slope” once tax relief is decoupled from marginal income tax rates, stressing that there would be “little to prevent” future governments from cutting tax relief to 25 or even 20 per cent in an effort to save money.
Greer concluded: “While a universal flat rate might be simpler to understand for some of the public, it is unlikely to make a dramatic difference on public comprehension of the benefit of pension saving.
“We need more than tweaks to policy to change the perception of pensions and their perceived complexity and open up pensions so that information is accessible, timely and is framed in a way that is easily understood.
“Financial education is a key part of that and can be greatly helped by pensions dashboards.”
Meanwhile, Pensions Management Institute president, Lesley Carline, stressed that the tax rate is just one inequality of the current system, stating that "fairness requires us to address them all".
She explained: "Firstly, there is the relevance of tax relief to members of DB schemes since there is no direct correlation between contribution rates and benefit accrual.
"Secondly, and probably the most pressing at the moment, is the anomaly between the net pay arrangement and relief-at-source for DC members who are low earners."
Citing a recent PMI survey, Carline emphasised that just 61 per cent of respondents expected to see a fixed rate of pension tax relief if the government were to seek fiscal savings from the pension system, compared to 74 per cent who believe that the government would abolish the triple lock.
She continued: “Since its introduction, the triple lock has been under fire for being unreasonably generous – particularly during an era of austerity.
"However, we would expect a Conservative government to be cautious about antagonising a social cohort it has traditionally looked to for electoral support.
"It is unlikely that the nation’s retired people will react sympathetically to any attack on the indexation of state pensions, and after the government’s handling of the Covid-19 emergency, any further measures, seen as detrimental to the elderly, would present a significant political risk.”
This article first appeared on Pensions Age.
Last update: 30 June 2020
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