Tax relief on pension contributions has for many years been the subject of lively debate and over recent years we have seen a plethora of legislative changes which have led not to the simple and fair system many would have liked, but to an ever more unsatisfactory and seemingly unfair approach.
Wealthier pension savers bemoan the restrictions in lifetime and annual allowances, saying this restriction makes planning difficult as the increase in fund value is determined by investment performance which may or may not be at the predicted level. It is worth noting that tax revenues from breaches of the lifetime allowance were in the region of £126m in 2015/16 according to HM Revenue and Customs figures. So it is perhaps not surprising we hear these cries of foul play.
On the other hand, 85 per cent of pension savers who pay the basic rate can rightly feel aggrieved that they receive much less tax relief on their lower pensions savings leading inevitably to a lower pension in retirement. The fact remains under the current system that higher earners still get more pension per pound invested because of this inequality in pension tax relief.
The lifetime ISA was intended as a simpler option and to encourage those less likely to save to start planning for retirement (or for a first home). However the danger here is that those savers most likely to use the lifetime ISA will have less to save and therefore opt out of a potentially much more attractive workplace pension. So whilst both wealthier and the not so wealthy savers benefit from the same rate of tax relief on savings, the less wealthy once again are more likely to lose out.
So is there an argument for a more radical rethink on pensions to come up with a regime with a more level playing field? And if so what might that look like?
A flat rate relief, regardless of which tax bracket a saver falls into, was, and still is, the favoured system of the former pensions minister, Baroness Altmann. There is no doubt that such a system would simplify matters considerably. Her suggestion of setting this at higher than the basic rate of tax could however, by adding considerably to the current cost of pensions tax relief of more than £50 billion, prove too costly - requiring perhaps a more general reduction in the permitted annual allowance to offset the cost.
This would, however, provide a welcome redistribution of pension wealth in the future, be a fairer system and encourage more saving for retirement. Who can argue with that?
If you would like to discuss any of the points raised, please contact Jackie Hall or your usual RSM contact.