Leading trade body calls for single rate of tax relief on pensions at 25% or 33% as current system “benefits the rich”

4th October 2015

img

The UK insurance industry’s leading trade body has called on the Government to sweep away the current system of pension tax relief which it argues is too complex and benefits to wealthiest savers most.

The government has just closed a consultation asking for views about reforming the system with one possible option adapting the pension regime to move more closely to that associated with ISAs.

But this would be likely to hit the tax reliefs currently available to higher rate tax payers.

Now in what will be seen as a dramatic shift in emphasis, the Association of British Insurers, which represents major retail pension companies has called for a new upfront government ‘Savers’ Bonus’ based on a single rate of tax relief. The ABI says this should replace the existing complex pension tax relief arrangements. This bonus should top up payments made into a pension at a rate of £1 for every £2 or £3 put in. This would set the rate at either 25% or 33%.

The proposal forms part of the ABI’s submission into the Government’s consultation on pensions tax reform. The trade body says its report draws on detailed work with pension providers, analysis from the respected Pensions Policy Institute, the National Institute of Economic and Social Research (NIESR), Populus consumer research and a review of academic research, to consider the options.

The ABI argues that the new system would create a simple and transparent system that could be more easily understood by savers and employers than the current system.

The ABI says the system would encourage personal responsibility by targeting savings incentives to lower and middle income earners. It says currently basic rate taxpayers only get £1 of relief for every £4 put in, while higher rate payers get £2 of relief for every £3 put in.

The ABI does not support the proposal to switch to a ‘pension ISA’, where contributions would be taxable and retirement income tax-free. This is known in industry parlance as Tax/Exempt/Exempt (TEE) as opposed to the current system of Exempt/Exempt/Taxed (EET).

The trade body says that while it may appear superficially attractive due to its potential for short-term savings for the exchequer and its simplicity, it would carry a number of risks including a costly, over fifty year transition period that would be confusing for savers and complex to manage.

It would put at risk employer contributions (which account for around  75% of all pension contribution tax relief) and the success of auto enrolment – the ABI says that evidence indicates that employer contributions are likely to fall.

It also argues that removing tax paid on pension payments at the same time as society ages and care costs increase would put a disproportionate financial burden on the working age population.

It also notes that economic thinktank the NIESR suggest that under the pension ISA proposal, GDP could be between 1.4% and 9% lower when transition to the new regime is complete. It says this is assuming some kind of matching contribution of between 20% and 30%.

Dr Yvonne Braun, the ABI’s Director of Long Term Savings Policy, says: “We believe that the new savers’ bonus is easy for savers to understand, keeps the upfront incentives to save for individuals and employers, targets help more fairly between low and high earners and saves money. While there is no ‘silver bullet’ solution to replacing the current complex pensions tax relief system, it is clear that no change is not an option, and a savers’ bonus, based on a single rate of tax relief meets the Government’s reform principles.

“In contrast, our forensic analysis of the options concludes that introducing pension ISAs risks dissuading people from saving for their retirement, would be costly and complex to implement, and hit economic growth.”

1 thought on “Leading trade body calls for single rate of tax relief on pensions at 25% or 33% as current system “benefits the rich””

  1. Jive Bunny says:

    “The ABI does not support the proposal to switch to a ‘pension ISA’, where
    contributions would be taxable and retirement income tax-free.”

    and “….keeps the upfront incentives to save for individuals and employers”

    and “In contrast, our forensic analysis of the options concludes that
    introducing pension ISAs risks dissuading people from saving for their
    retirement, would be costly and complex to implement, and hit economic
    growth”

    The lady doth protest too much methinks. Of course the ABI doesn’t support the pension ISA because this would freedom to individuals to invest their own money instead of being forced to leave it in the hands of incompetent/lazy fund managers employed by the insurance companies!!

    The “upfront incentives” she speaks of will be those tasty bonuses paid to the said fund managers for failure!!

    As for “dissuading people from saving” – WHY?? Another thing – why would it be “costly and complex to implement”? You just announce that tax relief is abolished on retirement saving and th einsurance companies then have to allow people to take control of their destinies (if they wish to) by handing over the monies they hold on behalf of those savers!! Oh, hang on, now, if the insurers have been operating a Ponzi scheme all along and there is little or no money to hand over without new contributions coming in now I see why it would be costly to implement – TO THE INSURERS!!!

Leave a Reply

Your email address will not be published. Required fields are marked *