Pension tax relief could be simplified as part of the Chancellor’s forthcoming tax plan, announced it today’s Spring Statement.
Announcing the outline of this plan, Rishi Sunak said he wanted to make the tax system simpler and fairer while reducing the overall tax burden on working families.
In background documents published today alongside this statement, the government has stated it would consider reforms of tax reliefs and allowances to support a fair and simple tax system. The government will now consult with businesses and other stakeholders over the summer, before proposing detailed reforms ahead of the Autumn Budget.
Pensions experts suggest this tax plan could include proposals to move to a flat rate of tax relief, as well as changes to other pension allowances, including the annual and lifetime allowances as well as the money purchase and tapered annual allowances.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown says: “Buried deep within the Spring Statement documents there was a startling sentence in which the term tax-relief was used alongside the words ‘fair’ and ‘simple’. The pensions tax relief system can’t be called either of these things with the complex web of rules likely to trip up even the savviest of people.
“While some people have an annual allowance of £40,000, for others it can be as low as £4,000 per year.
“Reform of the system is long overdue and would be welcomed by the industry and savers alike. If done well it could really incentivise people to make a meaningful contribution to their pension rather than merely supplementing existing savings levels.”
Hargreaves Lansdown has recently called on government to reform the Money Purchase Annual Allowance to help those who needed to access their pensions during the pandemic to be able to rebuild their pension when times get better.
Pension providers and advisers have also called for a changes to these some of these complex allowances – many of which remain frozen for the life of this parliament.
Scottish Widows head of policy Peter Glancy says: “We’ve long pointed out that the lifetime allowance (LTA) creates a ‘lose-lose’ position for both HM Treasury and pension savers, with less lifetime income for retirees and less lifetime tax revenue for HM Treasury. With inflation now running at close to 8 per cent per annum and the LTA frozen, the real value of pension pots could easily be eroded by a quarter in just three years.
“Normally, investment returns counter the effect of inflation. However, when you face a tax penalty of 55 per cent when your investments exceed the LTA, you could actually be fined if your assets keep pace with inflation. This clearly doesn’t make any sense and the Government needs to consider its decision to freeze the LTA.”
Jenny Holt, managing director, customer savings & investments at Standard Life adds: “The prospect of reform of pension tax relief looms large ahead of any Budget from the Chancellor as it’s been earmarked as an area of potential savings by the Treasury a number of times.
“However, changing such an important element of the pension system requires careful consideration and should be done in collaboration with the industry allowing sufficient time to support a smooth transition and implementation.
“There are a range of issues to consider here such as how any reform would be understood by savers and the potential to rebrand tax relief as something more intuitive to savers and how reform would be applied to DB schemes where there is a great deal of complexity. If pension tax relief were to move to a flat rate, there’s potential to introduce this at a level which provides a stronger incentive to lower earners to save whilst still making pensions attractive to higher earners.
“If a flat rate were introduced we would favour this being accompanied by the removal of related allowances, particularly the lifetime allowance, as the current system punishes an increasing number of savers who do the right thing and save regularly over their lives.”