The majority (79 per cent) of employers have been negatively impacted by the current pensions tax regime, with 89 per cent calling for simplification even if it means some people are worse off, research from the Association of Consulting Actuaries (ACA) has found.

The research, which is the first in a series of reports outlining the findings of the ACA’s 2020 Pension Trends Survey, found "huge support" for pension tax reforms amongst industry organisations, highlighting growing evidence of the negative impact on businesses.

In particular, it found that 27 per cent of respondents had seen skilled staff retiring prematurely as a consequence of the regime, whilst 36 per cent also reported having experienced pressure to change pay and benefits packages.

It also found that whilst respondents were split over what reforms should be put in place, more than three quarters (78 per cent) would support help for those on lower incomes, even if it reduces relief elsewhere.

Furthermore, whilst the majority of employers are opposed to pension tax relief being reduced to help cut public spending post-pandemic, almost half (40 per cent) would be prepared to see this happen so long as only applied to future, but not past, savings.

Commenting on the findings, ACA Pensions Taxation chair, Karen Goldschmidt, said: “The survey findings underscore the degree to which the present pension tax regime has been distorted by short-term tinkering over the years.

“It is having an impact on the economy by reducing productivity and workplace cohesion.

“The message is that there is a now urgent need for HM Treasury (HMT) and industry practitioners to find a consensus around the best way forward. The mounting dislike of the current complexity and adverse impact on business means that this task cannot be put off.”

The report also explored how respondents were handling issues around guaranteed minimum pension (GMP) equalisation, finding that over 9 out of 10 respondents expect to fully equalise within three years.

However, it emphasised that over a third (34 per cent) are still at the initial planning stage, with a further 6 per cent having taken no action at all so far.

Just under half (43 per cent) of respondents stated that they are likely to simplify their schemes by converting GMP at the same time.

This increased to 60 per cent if tax and legislation issues were resolved by HMT, HM Revenue & Customs (HMRC) and the Department for Work and Pensions (DWP), with a further 20 per cent of respondents currently undecided, but potentially looking to use GMP conversion.

Commenting on this, Goldschmidt explained that using GMP conversion to equalise will both avoid additional complexity and provide an opportunity for simplification, with benefits for members, employers the pensions industry and government.

She continued: “As our survey found this year, many employers and pension scheme trustees are keen to use GMP conversion, if the barriers can be removed/lowered.

“Just one more example of the complexity highlighted above in our survey, employers (and trustees) are seeing the current pensions tax legislation as a material, illogical and disproportionate block.

“The potential of tax pitfalls has already held back decisions on approach for many months, because of the uncertainty on what the pitfalls might be and the extent to which they can be managed."

She emphasised that schemes that have to carry out conversion urgently are taking legal advice, to find ways to manage what appear be pitfalls in the legislation, stressing that "clear practical guidance" is needed from HMRC in the short term.

She concluded: “But really what we need is law change as soon as possible so that schemes can use conversion confidently to benefit members, by making it more likely that members will receive benefits in full - because buy out would be cheaper; reducing the complex GMP restrictions; enabling income in retirement to be smoother; and making it easier for members to understand their benefits.

“And DWP would see the change enabling a solution to equalisation that DWP has been promoting for 5 years".

The findings come ahead of the Chancellor's spending review, expected on Wednesday 25 November, which could include changes to pensions tax relief, income tax and state pensions.

Industry experts have recently warned that any tax relief changes must not "discourage" retirement savings, stressing that the tax system can have a big impact on long term saving and investment behaviour.

Share Story: