Pensions - Articles - Time to end pension tax relief inequality

A recent report commissioned by the Association of British Insurers (ABI) and conducted by the Pensions Policy Institute (PPI) has further highlighted the well-known fact of inequality in the UK’s pension tax relief system.

 The report found that basic rate taxpayers – over 80% of all taxpayers – only receive 26% of the tax relief on defined contribution (DC) payments, while those under the age of 40 receive just 27%.

 Presently, the Treasury provides 20% tax relief on pension savings for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.

 According to the PPI’s report, introducing a single flat rate (e.g. 30% for everyone) could increase the overall pensions tax relief for basic rate taxpayers from 26% to a more equitable 42%.

 Stuart Price, Partner and Actuary at Quantum Advisory, said: “A reform of the pension tax relief system is long overdue, and I believe it’s more a question of when this will finally happen, than if.

 “A new, simplified, system would also remove the complexity that plagues the current system, and moving to a single flat rate could also provide an additional boost in pension savings for the lower paid and younger generation who need it most.

 “Moving to a flat rate of 30% would be broadly cost neutral for the Treasury and would provide additional savings for those who need it.

 However, given the financial uncertainties brought about by COVID-19, the Treasury might be inclined to move to 20% for all. While this would bring in an additional £10bn per annum of revenue to the Treasury, it would not help the lower paid and younger generation with their pension saving, which in my opinion needs to be addressed sooner rather than later or we risk having a generation that cannot afford to retire.”

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