UK’s pension tax relief proposal could cost high earners £44k

Higher earners in the UK could see their retirement fund fall by tens of thousands of pounds under proposals to level the pension tax playing field that were called for by MPs.

A 40% rate taxpayer would have £45,000 less in their retirement fund according to figures by national advice firm LEBC.

The Treasury Select Committee’s proposed reforms to the system that rewards pension savers will, on the other hand, give low earners a push towards their pension savings around the £44,000 mark.

The MPs argued the main financial incentive the government provides for long-term saving was not an effective or well-targeted way of incentivising saving into pensions.

They said in a report that the government may want to consider “fundamental reform” but said the existing state of affairs could also be improved through further, incremental changes.

“The government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution,” the report added.

It explained that in 2016/17, the cost to the taxpayer of income tax and national insurance contributions relief on pensions was around £41bn.

“The tax relief offered has become less generous in recent years, with the annual allowance currently £40,000, against £255,000 in 2010/11. Meanwhile, the lifetime allowance has fallen from £1.8m to £1.03m.”

Additionally, the annual allowance has been tapered for high earners since 2016, and the money purchase allowance was introduced alongside pension freedoms, it added.

Currently tax relief is given on savings as they enter the pension pot and at the saver’s marginal tax rate, while savings are taxed as people withdraw them for their retirement.

ABOUT THE AUTHOR
Pedro Gonçalves
Pedro Gonçalves is Financial Correspondent at International Investment.

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