Steve Hitchiner: The wider implications of any tax changes may not be immediately apparent
The Society of Pension Professionals (SPP) has urged the government to “carefully consider” any changes to the pensions tax relief regime – warning of the hidden consequences of a rushed move.
Commenting ahead of chancellor Jeremy Hunt's Autumn Statement, SPP president Steve Hitchiner said the goal of pensions taxation should be "to support and embed sustainable long-term retirement saving".
Hitchiner said that, while the SPP recognised the fiscal challenges currently faced by the UK government, it would encourage "careful consideration" of the rationale for disincentivising pension saving through reductions in pensions tax relief.
In particular, it said pensions tax changes could be detrimental to long-term retirement saving - noting it was important to continue to support auto-enrolment and avoid any changes that undermine or reverse its progress. The SPP added there also need to be clear incentives if greater levels of savings are to be achieved.
The SPP also said the true cost of tax relief is significantly less than is typically quoted.
It said a recent debate in the House of Lords highlighted total gross income tax and national insurance relief of £67.3bn for 2021 but noted that 45% of this relates to employer contributions to defined benefit schemes.
The SPP said this will include significant deficit repair contributions for historic service, rather than current contributions for particular individuals - adding that the figure for income tax relief on individual member contributions is considerably lower at £14.1bn.
In reality, Hitchiner said most of what is quoted as tax ‘relief' is simply tax deferral - with relief provided on pension contributions at an individual's marginal rate of income tax, but then taxed as income in retirement.
Hitchiner said: "Pensions tax relief is complex, and the wider implications of any changes may not be immediately apparent.
"Seemingly straightforward changes may be far more complicated and costly to implement than might appear to be the case. If fundamental change is to be considered, the government should take its time and consult widely."
The SPP said that if there were to be fundamental changes to tax relief, the key things to avoid were:
- Changes to tax relief that result in reduced take home pay for members. The SPP said this would risk increased ‘opt-outs' and undermine auto-enrolment, particularly given current cost of living pressures.
- Unintended consequences that damage trust and confidence in pension saving. The SPP said the impact of the tapered annual allowance on the NHS Pension Scheme is a good example where the wider implications were not properly considered.
- Changes that lead to significant administrative burdens for employers. The SPP said changes to pension arrangements may be costly for affected businesses to implement, many of whom are facing financial and resource pressures at the current time.
Recognising the importance of long-term incentives
Aegon also called on the chancellor to recognise the importance of long-term savings and "avoid temptation" to reduce savings and pensions incentives.
The firm said those who are saving for the future "need more incentives now more than ever before".
Aegon called on the chancellor to make sure individuals are appropriately incentivised to save for their futures.
Pensions director Steven Cameron argued the chancellor has a "particularly challenging" budget to deliver this week, to ensure the UK returns to a position of financial soundness.
"We'd call on the chancellor to continue to offer appropriate incentives to individuals who want to get their personal finances on a long-term sound footing, including the millions who are investing or saving in pensions," he said.
"As well as providing for themselves, those contributing to private and workplace pensions are reducing their reliance on the state to fund their future retirement. This should be welcomed as tomorrow's state pensions aren't paid for out of some huge fund built up in the past, but from the National Insurance contributions of tomorrow's workers."
Cameron added: "There's little doubt that chancellor Hunt, like many chancellors before him, may be tempted to collect more in taxes by reducing the tax relief available on pensions. There may well be merit in spreading the tax relief granted more equitably across those on different income levels. But we urge care in rushing into complex reforms today which could have damaging consequences longer term such as putting people off saving.
"At times like these when the squeeze is being felt by almost everyone, offering incentives to put aside some of today's scarce income to boost individuals' future financial stability may be needed more than ever."
