Aegon urges Govt not to ‘go too far’ with pensions tax cut

Amidst growing speculation that the Government could cut the tax relief on pension contributions for higher earners, Aegon has warned that rushing to cut pensions tax relief could do long-term damage to UK retirement savings.

Aegon stressed that there are multiple long-term benefits to pension saving and called on Chancellor, Sajid Javid, to consult fully, rather than adversely create any ‘unintended consequences.’

The group also suggested that the three biggest areas of complexity in pension taxation relate to the tax treatment of employer contributions, how to avoid a ‘salary sacrifice loophole’ and how to apply such an approach to defined benefit schemes.

“Currently, individuals receive tax relief at their highest marginal income tax rate on their personal contributions, so moving to a flat rate somewhere between basic and higher income tax rates would be good news for non-taxpayers and basic rate taxpayers, while higher and additional rate taxpayers would see their Government top-ups reduced,” Aegon pensions director, Steven Cameron, said.

“In terms of simple appeal, a flat rate relief of 33% would see the Government add £1 for every £2 from individuals. But if set below 30%, higher rate taxpayers expecting to pay higher rate tax in retirement might find pension saving unattractive, undermining the success of automatic enrolment which ‘works’ because pension saving is in virtually everyone’s interest.

“Simply removing higher rate relief and granting 20% relief to everyone would not affect basic rate pension savers but would severely dent the attractions for higher rate taxpayers, many of whom are far from wealthy.

“Rushing to cut pensions tax relief could do long term damage to UK retirement savings, so we urge the Chancellor and his team to avoid going too far, too fast and instead to engage with the industry to resolve issues. We also recommend testing any new approach with savers to understand how it might change retirement savings behaviours.”

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