Incentivising pension saving through tax relief cost the Exchequer £38.4bn in 2017/18, an increase on the £37.3bn figure reported in 2016/17, government figures have revealed.
However, despite being higher than the previous year, the figure is still down from its peak in 2015/16 when the sum was £38.6bn.
The figures illustrated that once income tax paid on pension withdrawals was taken into account, the net cost was £20bn. While this sum is still higher than 2016/17’s £19.4bn, it is still significantly lower than 2015/16’s £20.9bn.
Commenting on the figures, AJ Bell senior analyst Tom Selby said: “The cost of pension tax relief is enough to make any Chancellor wince but it is interesting that the roll out of auto-enrolment has not increased the cost to the Exchequer over the past couple of years.
“Context is also hugely important when deciding whether this is money well spent. Even with auto-enrolment and recent increase in minimum contributions to 8 per cent of relevant earnings, most people are not saving enough to guarantee a comfortable retirement.”
In a recent select committee hearing, Chancellor Philip Hammond dubbed pension tax relief as “extraordinarily generous” and “heavily skewed to the better off in society”.
“The Chancellor is right to say pension tax relief is ‘extraordinarily generous’ and at this juncture the focus needs to be on getting this message across to people so they save more for their futures. The combination of a minimum 25% savings bonus which you can access at 55 (rising to 57 by 2028) with 25% tax-free is hugely attractive, and all parts of the industry need to do better at communicating this fact,” Selby said.
The AJ Bell analyst emphasised that government also “has a role to play” in ensuring people make the most of the retirement saving incentives on offer, noting that the “chipping away” at allowances, along with “creeping complexity” fir higher earners has led to a perception that the system as a whole is “impenetrable”.
“It’s hard to imagine anybody designing a retirement savings system from scratch today would opt for three different annual limits as well as a lifetime limit to control costs. With Brexit making it impossible to get any meaningful legislation through, Government should use this opportunity to consider how the savings system can be simplified. Given the controversy it has caused with NHS consultants, an obvious first step would be to scrap the horrendously complicated taper altogether,” he concluded.
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