Govt rejects calls for ‘fundamental reform’ to pensions tax relief

Written by Theo Andrew
15/10/2018

The government has rejected calls from the Treasury Committee to fundamentally reform pensions tax relief after it said there was “no clear consensus” to do so.

In its response published on 12 October the government said that any changes to the regime could have "significant impacts for pension schemes, employers and individuals".

In its July report, the Treasury Committee said that there is “widespread knowledge” that tax relief is not an “effective or well-targeted” incentive to saving and suggested “fundamental reform” or “incremental changes” such as introducing a flat rate of relief.

Despite this, the government said it consulted on reforming pensions tax relief at the time of the summer 2015 Budget, but found that there was not enough evidence to suggest it would have a difference in its four key principles, which included simplicity and transparency, personal responsibility, building on automatic enrolment and sustainability.

On the latter point, the government said any changes would not be in line with the government's long-term fiscal strategy.

“The consultation showed there was no clear consensus on reforming pensions tax relief in a way that met the four principles set out above. The government is also aware that any changes to the pensions tax relief regime could have significant impacts for pension schemes, employers and individuals," its response read.

“While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015.”

Furthermore, the government noted changes it has made around restrictions to the annual allowance on tax relief for those with an income of over £150,000 and the reduction of the lifetime allowance tax relief from £1.25m to £1m.

Despite the government response to the Committee, Chancellor Philip Hammond today said that pensions tax relief has become “eye-wateringly expensive”, according to a report in The Times.

Hammond made the comments while speaking at the International Monetary Fund’s annual conference in Bali, adding that nothing had yet been ruled out.

Pensions tax breaks could costs the Treasury up to £39bn a year.

Aegon head of pensions, Kate Smith, believes that while we should not expect to see any radical changes in this year’s budget, it’s inevitable that changes will be made to tax relief in the future.

“We will be watching closely to see if the Chancellor follows through on his hints and makes cuts to pension tax breaks. It seems inevitable that changes to pension tax relief are to come in the future. Pensions have been seen as ‘low hanging fruit’ by the government.

“Any pension tax cut will create uncertainty and can be counterproductive by putting people off pension saving. The government should be thinking long-term and have joined up policies working across the board.

"Ultimately any changes made now are set to impact a generation of pension savers, many of whom are only just beginning to save into a pension as a result of auto-enrolment,” she added.

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