Pension: What's needed to fix ‘regressive’ tax relief system – 'savers must be empowered'

Pension assets are built up over a person’s working life and private pensions, which these days are likely to mainly concern defined contribution schemes, are becoming ever more crucial. The UK state pension is notoriously low and the government has actively encouraged people to contribute more to their retirements in recent years.

On top of this, it was found that higher earners receive more beneficial results than those on lower incomes, as quoted from the report: “The income tax regime is structured in a progressive manner that is those who earn more pay at a higher rate.

“This results in the pension tax relief system being naturally regressive as it offsets against a progressive structure.

“As a result, higher earners may make greater personal benefit of tax relief by making larger pension contributions which are relieved at a higher marginal rate.”

In response to these findings, experts within the financial field provided their insight into how some of the problems could be rectified.

Stuart Feast, a Pension Specialist at Zippen, detailed that he thought the government should do moving forward: “When it comes to pensions, the equal distribution of tax relief is never going to be fair, in that lower paid workers don’t have the readily realisable income to save into pensions, in order to receive the relief in the first place.

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“Therefore, the highest paid are always going to have an advantage in this unequal debate, although the tapered annual allowance restriction for the highest earners has limited their advantages. The question is what can be done about it and the main answer is that the Government and the Advice Sector must raise awareness of the tax reliefs available.

“And herein lies problem number one, in so far as why would the Government want to raise awareness about something that costs them money?

“The other problem is that even the words ‘tax relief’ mean very little to a vast swathe of the general public, so perhaps we can adapt the language, to ensure greater engagement. Tax rebate, for example, a very simple change (even though maybe not technically correct!) would at least pique the interest of a lot more people.

“This should be targeted towards those where the biggest tax relief gap appears, which is basic rate tax payers and women. In addition, paying pension contributions by way of salary sacrifice should also be encouraged, as this has the potential to provide both tax relief and reductions in an Employee’s National Insurance contributions.

“At some stage, we have to make up our minds whether or not we think pensions are a sensible long term strategy and the relative success of the Auto Enrolment market confirms that it probably is. In most cases, pensions are the only investment where any form of tax relief/refund/rebate is available, so the public should be made more aware of it.”

Anna Murdock, the Head of Wealth Planning at JM Finn, also commented on the findings.

She detailed that while the findings may be disheartening for certain groups, it should not put us off our collective financial efforts: “The Pensions Policy Institute report highlights the fact the system of tax relief disproportionately benefits older age groups who tend to be higher earners; lower earners don’t enjoy as much tax relief as many of their higher paid, older counterparts when it comes to contributing to their pensions.

“Nevertheless, this isn’t a reason for young savers to switch off to pension saving; the tax-free incentives are too great, and should balance out over the long-term. For a generation set to be transferred trillions in cash and assets within the next decade, using available tax wrappers, such as pensions, is a key component to long term investment and savings.

“Whilst automatic enrolment into workplace pension schemes has helped younger savers, potentially a simple and attractive flat rate of income tax would encourage younger savers to set aside more for retirement.

“If things are to change, savers must be empowered to save as early as possible and to do that, they must be supported and encouraged by the Government with simple and easy to understand tax incentives.

“I think these incentives should remain constant to embed a successful savings culture, rather than being tweaked as different political parties or chancellors come to power.”


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