UK's ABI renews call for flat-rate pension tax relief

The Association of British Insurers (ABI), together with the Pension Policy Institute (PPI), this morning published a report calling on the British government to simplify the pension tax relief system, and specifically urges moving to a flat-rate of pension tax relief--a proposal some in the industry described as 'radical.'

The report urges a simplification of pension tax relief, particularly relating to a proposal for a new flat rate of tax relief on pensions. The PPI, which carried out the report's research, found that basic-rate taxpayers (who pay 20% in income tax on their salaries) make up over 83% of total taxpayers but receive just 26% of tax relief on any defined-contribution pension funds.

Jon Greer, head of retirement policy at Quilter, said any such move "must be carefully considered. Pensions are for the long-term and so any policy making needs to be made with that in mind. We cannot have an overhaul of the pension tax system only to find it flawed and altered when challenges present themselves. Consultation on how it could be implemented, and to which schemes, is important as on the surface it sounds like an easy thing to do, but in practice it is not necessarily the case."

Greer added: "While a flat rate of 30-33% would be re-distributive and benefit basic rate taxpayers, it would be broadly revenue neutral for the government.  And this begs the question, what will they do next? Once pension tax relief is decoupled from marginal income tax rates it is a slippery slope and there would be little to prevent future governments then cutting tax relief to 25% or even 20% to save money."

"It is also important to remember that income tax relief on pension contributions is not truly a relief in the conventional sense, but a tax deferral mechanism. Pensions are liable for income tax, but this is applied on the way out, not on the way in. This tax deferral system creates an incentive to save for the future and ensures people are contributing some income tax later in life, helping to smooth fluctuations of demography and the pressures of an ageing society."

 Andrew Tully, technical director at Canada Life, said: "We must learn the lessons of the past and not make any kneejerk changes. There are a number of difficulties in implementing changes as we have different systems of giving tax relief."

Yvonne Braun, the ABI's director of long-term savings, said: "Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women."

"We hope the research will provide food for thought on how to make the system simpler and fairer."

However Greer warned, "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."

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