Pension tax relief fears raised as Parliament publishes reform paper

A House of Commons briefing paper published yesterday has reiterated the arguments for a fundamental overhaul of tax relief on pensions, alarming pension professionals that big changes could be on the way in next month’s Budget.

Parliament-UK-Government-Dusk-700.jpgThe paper, called Reform of Pensions Tax Relief, published by the House of Commons Library yesterday, says that £38.2bn of tax relief was provided on pensions in 2015/16, with £13.4bn received from pensions in payments. But it rejects the view that this means the net cost to the Treasury is £24.8bn, arguing that the £13.4bn received includes tax paid on pots accessed through pension freedoms, thereby diminishing the scale of the true annualised net cost to the Exchequer. It does not project the increased cost by 2020 of tax relief on a full 8 per cent contribution into auto-enrolment schemes. It states that NI relief on employer contributions cost a further £15.7bn over the period.

The paper states that despite measures to curtail tax relief for higher earners, 65 per cent of tax relief will go to higher rate taxpayers in 2018 under its projections.

The paper references the July 2015 consultation on reforming pension tax relief and strengthening the incentive to save. It sets out the arguments for a single rate of tax relief, quoting support from the ABI and Low Income Tax Reform Group. However, it quotes the Pensions Policy Institute as being concerned at the complexity of implementation.

The paper also sets out the arguments for and against a switch to a taxed, exempt, exempt ‘TEE’ system, and also modifications to the existing system. Removing the LTA for DC and the annual allowance for DB were two proposals floated in the paper, paid for by reducing the AA for DC schemes and the LTA for DB schemes.

Aegon pensions director Steven Cameron says: “With Brexit absorbing huge amounts of brain power across Government and leaving room for little else on the legislative agenda, any attempt to introduce radical reform to pensions tax relief in the November Budget would look extremely risky. However, the very recent addition of an updated briefing paper ‘Reform of Pension Tax Relief’ to the House of Commons library does set alarm bells ringing.

“Ahead of every Budget, there is always speculation that the Chancellor will take his tax axe to pensions. Longer term, moving to a flat rate of relief for all levels of taxpayer, presented as a £1 Government top up for every £2 contributed may be considered fair. But the practical implementation challenges are huge, particularly for defined benefit schemes which receive a major share of all tax relief.

“While the timing of the updated paper is worrying, it does offer a helpful reminder to MPs of just how complicated and divisive any radical reform would be.”

Capital Cranfield professional trustee Andy Cheseldine says: “It had been released the day the pension minister spoke at the PLSA but he didn’t mention it. That could mean a number of different things. It’s a pity we weren’t able to ask him about it. It could be that the publication of this document a month before the Budget is purely co-incidental and there may be no change. Or it could be softening us up for a further cut in tax relief within the existing structure.

“These numbers don’t forecast forward to 2020 when the true effect of impact of AE and will add a further £15bn of tax foregone. They don’t want to use the £15.8bn figure for money received because that is pumped up by all the extra revenue from people cashing in their pensions early through freedom and choice.