A flat rate of tax relief on Defined Contribution (DC) pension contributions would increase the proportion of DC pension tax relief associated with basic rate taxpayers from 26% to 42%, according to a new report.

Research published by the Pension Policy Institute (PPI) and Association of British Insurers (ABI) showed that basic rate taxpayers make up 83.4% of total taxpayers but only receive 26% of the pensions tax relief related to DC pension contributions.

A basic rate taxpayer, who works and contributes continuously to a pension, could get around one fifth more from their savings under the current tax advantaged system than under a non-advantageous structure, the report stated. However, a higher rate taxpayer could receive around half as much again from their savings.

For every £100 of DC pension contributions made from gross earnings or by an employer, the PPI and ABI report suggested that £32 of income tax has been relieved. The research also revealed that since the implementation of automatic enrolment the proportion of pension tax relief going to those earning less than £30,000 has only increased from 23% to 24%, despite the proportion of claimants increasing from 52% to 63%.

Responding to the report, Quilter head of retirement policy, Jon Greer, described moving to a flat rate of pension tax relief as a “radical proposal” and one that must be carefully considered.

“Pensions are for the long-term and so any policy making needs to be made with that in mind. We cannot have an overhaul of the pension tax system only to find it flawed and altered when challenges present themselves,” he added.
 
“It is also important to remember that income tax relief on pension contributions is not truly a relief in the conventional sense, but a tax deferral mechanism. Pensions are liable for income tax, but this is applied on the way out, not on the way in.

“While a universal flat rate might be simpler to understand for some of the public, it is unlikely to make a dramatic difference on public comprehension of the benefit of pension saving. We need more than tweaks to policy to change the perception of pensions and their perceived complexity and open up pensions so that information is accessible, timely and is framed in a way that is easily understood. Financial education is a key part of that and can be greatly helped by pensions dashboards.”

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