Consultation on pensions tax relief

Consultation on pensions tax reliefThe government is consulting on a simplification (read into that whatever you want) of the pensions tax relief system.

It has produced a Green Paper posing a series of eight questions and is looking for responses by the end of September.

The Green Paper points out that the net cost to the Treasury of tax relief on pension contributions is some £21.2 billion a year (based on the 2012/13 tax year).

The net cost is arrived at by deducting from the total cost of tax relief the income tax take from pensions in course of payment.

Two-thirds of this tax relief goes to higher and additional income tax rate payers.

Although to be fair to the Green Paper authors they do point out that over time changes to the pension tax system has reduced the amount going to higher and additional rate tax payers and will continue to do so.

Call me cynical if you like but the way in which the questions are posed implies that the Treasury already knows what it wants to do and is dipping its toe in the water to test the temperature for radical change.

Take a couple of questions together to see the thrust of government thinking on the subject;

Q1: To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension?

And….

Q2: Do respondents believe that a simpler system is likely to result in greater engagement with pensions savings?

So the implication is that tax relief is complex.

Which is true to some extent because the government has made it that way with the annual allowance rules, the carry forward rules, the pension input period rules (which thankfully are being changed) and the lifetime allowance rules that are by their very nature “anti-aspirational”

Aspirational was a word being bandied around a lot in the run up to the general election so it will be interesting to see if it mentioned in this review.

Question two is sort of the sucker punch – who can say “no” to that question?

Yes, a simpler system is desirable but actually nigh on impossible for the government to achieve.

This is because change is likely to introduce yet another layer of complexity on top of what we already have.

So to achieve simplicity change is going to have to be quite radical.

Abolition of tax relief on pension contributions and simultaneous removal of income tax on pensions in course of payment will save the Treasury the above mentioned £21.2 billion a year but it is not clear that this will result in higher levels of long-term pension savings.

This is perhaps, because no one trusts that having removed tax relief from pension contributions a future government might then seek to reintroduce tax on pension income.

Responding to the Green Paper is open to everyone. It is a vitally important subject.

We will be responding and so should you.

Strengthening the incentive to save: a consultation on pensions tax relief

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