Only £0.6bn in savings would be achieved if pensions tax relief was reformed to a single flat rate of 25 per cent, PLSA policy board member and LCP head of DC, Laura Myers, has warned, amidst speculation the government may look to the pensions sector to claw back savings in the upcoming autumn Budget.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Annual Conference 2021, Myers stated that she initially favoured a single rate of tax relief at 25 per cent, “but when you look at this in more detail, its horrendously complex for DB, so you end up just looking at a flat rate for DC savers, and then with all of the changes, such as potentially needing to move all schemes from net pay to RAS, it actually only generates £0.6bn of revenue for the exchequer”, she explained.

The PLSA has reviewed seven potential pensions tax systems that have been suggested in recent years, including flat rate, a reduction in AA or LTA, removing NI relief on employer contributions and the TEE system.

None of the system meets the five key principles Myers stated that the PLSA believes should be at the centre of any tax reform. These are to promote adequacy and incentivise saving for retirement, encourage the right saving behaviours, being fair, helping everyone save for retirement, making it simple to adopt and administer, and finally durability “to avoid this merry-go-round of speculation that had dogged pensions tax relief for the past decade”.

“What we found was there is no perfect system – none meet all the criteria that we set,” Myers stated.

“Unfortunately, the best you get is two out of the five [principles]. And that is why there has been 20 years of speculation with tax relief changes. It’s hard because, quite frankly, you wouldn’t start from here, so you end up looking for the least-worst situation on radical reform, and then when you delve into the actual numbers and potential benefits, and the amount of revenue it can generate for the government as well, those figures are uninspiring.

“So, on balance it is the existing system that we support that matches our criteria the most closely. We know it’s not perfect, but it does cause the least harm.”

Rather than embarking on major tax reform, Myers suggested focusing on some of the “smaller points around inequalities, for example around the net pay/RAS issue”.

“I think we might have to split out DB and DC, get rid of all the complex tapering, and have a lower annual allowance for DC, and a lower LTA for DB. I know there’s problems with this suggestion, such as gaming the system and I don’t think it’ll raise much money, but it’s simpler for DB, it gets doctors back to being doctors, and it would be easy to communicate for DC,” she added.

Also speaking at the session, Institute for Fiscal Studies deputy director, Carl Emmerson, recommended capping the amount of pension that can be taken tax free, as opposed to the current unlimited 25 per cent tax free lump sum that can be taken.

“Putting a cap on the pension tax-free lump sum makes more sense than putting a cap on the total amount of pension pot that you can accumulate. And it makes a lot more sense than putting an annual limit of how much you can put into a pension,” he stated.

There is a “strong case for some NICs being levied on either employer pension contributions or on pension income in receipt”, Emmerson also suggested.

“There is lots of revenue at stake here; the total relief on employer contributions is about £11bn a year. Alternatively, if you were to put NICs on pensions in receipt, we estimate that every per cent you charge would get you approximately £650m a year,” he explained.

Emmerson also described the current treatment of pension pots that are bequeathed as “indefensibly generous”.

“If you die before age 75, the entire pot can escape income tax entirely and there is no inheritance tax either. It is incentivising pension pots to be used as an inheritance vehicle rather than as a retirement savings vehicle,” he said.

“I’m really not clear why the policy rationale is pushing on in that direction. This is a particularly important one to fix soon as the longer you leave it in place, the longer people legitimately will say ‘well I put money in my pension with the expectation that I would use that to give money to my heirs’. So, I think it is important to try and keep that toothpaste in the tube while you can.”

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