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Pension tax relief changes could damage emerging savings culture

17/04/2015

This week’s party manifesto proposals* risk undermining public confidence in pensions at a time when savers are adapting to the most radical reforms to the UK pension seen in a generation. 

Firstly, the proposed logic for a flat rate of tax relief is that it would incentivise basic rate tax payers to save more into a pension. However, research conducted by YouGov on behalf of Old Mutual Wealth indicates this may not follow as consumer understanding of the pension tax relief system is extremely limited:

- Less than half (43%) of people understand that higher rate tax payers receive a higher level of incentive to save via pensions than basic rate taxpayers
- 7% think higher rate taxpayers receive less incentive
- 16% think everyone receives the same rate of relief
- 34% admit they don’t know
- Asked if they would support a flat rate of tax relief, 44% said yes, 35% said no and 21% simply don’t know
These figures suggest awareness is limited to the extent that the impact of introducing a flat rate of tax relief is hard to predict and would by no means guarantee an increase in saving. It is possible some basic rate tax payers may even feel the increase in Government contributions could afford them a decrease in their own personal contribution to achieve the same savings outcome.
Both basic and higher rate tax payers need to be empowered to make an informed decision as to their saving choices about how they want the savings environment in the UK to function. Such a change would break the link between tax paid and pension tax relief, which is a fundamental principle that has underpinned pension saving for generations and helps in motivating people to take responsibility for their retirement savings versus instant gratification through spending.
Secondly, proposals to curb the tax relief available to those earning over a certain level risks discouraging aspiration and long-term saving. Limits on annual and lifetime pension saving already exist in order to control the cost of pension tax relief and by further limiting tax relief available to higher earners, Government risks stunting ambition and punishing aspiration, both of which are vital to the success of the country.
The politicisation of pension policy removes the security of outcome that people need in order to place confidence in long term saving for their retirement.
Confusing savers by the introducing of further changes to the pension taxation system shortly after the most fundamental reforms seen in a generation threatens to undermine public confidence in pension savings by creating uncertainty.
Adrian Walker, Old Mutual Wealth retirement planning expert, comments:
“Pension tax relief is becoming an electioneering pawn undermining the emerging consumer confidence in pensions.
“Tax relief on pension contributions is founded on the basic principle that those who work receive an equal and opposite incentive to save for the long term. To break the link between tax paid and pension tax relief disregard the entire principal that underpins this important savings incentive and motivates long-term UK wealth creation.
“Public perception of pensions is improving but remains fragile and any further changes at this stage could undo all the good work we have seen this year.”
*Liberal Democrats propose to consult on the introduction of a flat rate of pension tax relief. Conservatives and Labour to curb pension contributions for those earning over £150,000 in order to fund an increase in the IHT threshold and a decrease in tuition fees respectively.

- Less than half (43%) of people understand that higher rate tax payers receive a higher level of incentive to save via pensions than basic rate taxpayers
- 7% think higher rate taxpayers receive less incentive
- 16% think everyone receives the same rate of relief
- 34% admit they don’t know
- Asked if they would support a flat rate of tax relief, 44% said yes, 35% said no and 21% simply don’t know

These figures suggest awareness is limited to the extent that the impact of introducing a flat rate of tax relief is hard to predict and would by no means guarantee an increase in saving. It is possible some basic rate tax payers may even feel the increase in Government contributions could afford them a decrease in their own personal contribution to achieve the same savings outcome.

Both basic and higher rate tax payers need to be empowered to make an informed decision as to their saving choices about how they want the savings environment in the UK to function. Such a change would break the link between tax paid and pension tax relief, which is a fundamental principle that has underpinned pension saving for generations and helps in motivating people to take responsibility for their retirement savings versus instant gratification through spending.

Secondly, proposals to curb the tax relief available to those earning over a certain level risks discouraging aspiration and long-term saving. Limits on annual and lifetime pension saving already exist in order to control the cost of pension tax relief and by further limiting tax relief available to higher earners, Government risks stunting ambition and punishing aspiration, both of which are vital to the success of the country.

The politicisation of pension policy removes the security of outcome that people need in order to place confidence in long term saving for their retirement.

Confusing savers by the introducing of further changes to the pension taxation system shortly after the most fundamental reforms seen in a generation threatens to undermine public confidence in pension savings by creating uncertainty.

Adrian Walker, Old Mutual Wealth retirement planning expert, comments:

“Pension tax relief is becoming an electioneering pawn undermining the emerging consumer confidence in pensions.

“Tax relief on pension contributions is founded on the basic principle that those who work receive an equal and opposite incentive to save for the long term. To break the link between tax paid and pension tax relief disregard the entire principal that underpins this important savings incentive and motivates long-term UK wealth creation.

“Public perception of pensions is improving but remains fragile and any further changes at this stage could undo all the good work we have seen this year.”

*Liberal Democrats propose to consult on the introduction of a flat rate of pension tax relief. Conservatives and Labour to curb pension contributions for those earning over £150,000 in order to fund an increase in the IHT threshold and a decrease in tuition fees respectively.

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