The majority of employers think that the existing pension tax structure is too complicated and needs simplifying, according to research by the Association of Consulting Actuaries.
There is high speculation that pensions tax relief is set to be reformed in the Autumn Budget later this month. The net cost of pensions tax relief for the 2016/17 year came to £25.1bn.
Royal London’s director of policy, Steve Webb, predicted that chancellor of the exchequer Philip Hammond would announce a cut to the annual allowance within his next two Budgets.
The rules currently, as they stand, are so complex that it is incredibly difficult to be confident that they have been applied correctly
Jenny Condron, Association of Consulting Actuaries
Savers are currently allowed to contribute up to £40,000 a year to their pension without triggering a tax charge.
The ACA found that 59 per cent of employers think that the current pension tax relief framework is "too complicated and needs simplification".
Seventy-eight per cent argue that the tapered annual allowance “should be re-thought”.
Introduced in the 2015 Summer Budget, the tapered annual allowance reduces the level of tax relief available to higher earners.
Tax relief on pensions is viewed by experts as “low-hanging fruit” for the chancellor, who last week described pensions tax relief as "eye-wateringly expensive".
Pensions should not be taxed twice
The ACA’s research revealed that around a third of employers believe that “changes and increases in pensions taxation over recent years” has led to senior staff opting out of their occupational schemes.
It has also forced businesses to review their pay, benefits and pensions arrangements, the ACA says.
“The rules currently, as they stand, are so complex that it is incredibly difficult to be confident that they have been applied correctly,” according to ACA chair Jenny Condron.
“Unless you are immersed in the pension tax rules, you cannot understand all of the detail and apply it, and pension scheme administrators simply do not spend their days immersed in pensions taxation to understand that complexity,” she added.
Condron opposed the taxation of both a saver’s contributions and the payout they receive.
“Either we limit the tax relief on pension savings, and let the output be whatever it is, or we cap the output without limit to what you can save year-on-year,” she argued.
Change can hamper saving
Last year’s Autumn Budget passed without any changes to tax relief. Seventy-five per cent of employers who responded to the ACA supported changes to the structure that would “target more help on lower income earners”.
Kate Smith, head of pensions at provider Aegon, said that reforms would unsettle savers and threaten to disrupt the progress achieved through automatically enrolling workers into a pension.
“Any pension tax cut does create uncertainty and can be very counterproductive, and put people off pension saving,” she said. “If the government keeps on changing the goalposts, this is just really unhelpful,” she added.
Smith is opposed to any changes to pensions tax relief before 2020, but did back the simplification of tax relief as part of a future review.
“For the vast majority of people, pension tax is not that difficult, but they don’t understand it,” she said.
Annual allowance may be cut
The annual allowance rate fell significantly between 2010/11 and 2011/12 to £50,000 from £255,000. Over 2014/15, it was again cut to £40,000.
Webb, who was the coalition government’s pensions minister between 2010-2015, predicted that the annual allowance would inevitably come down, “whether it’s this Budget or the next”.
A Royal London policy paper published on October 14 speculated that tapered annual allowance could also be reduced from its current level of £150,000.
It commented that “a reduction in the threshold for the tapered annual allowance to £125,000 seems perfectly possible”.
The provider has observed that the tapered annual allowance has deterred some high earners from contributing more than £10,000 per year into their pension, pushing them to rebalance their remuneration packages away from pensions savings in favour of a cash alternative.
Providers say retirement defaults could help poorer pensioners
Research highlighting the increasingly complex financial decisions and lower levels of income facing the next generation of retirees has led to renewed calls for default pathways through retirement.
“Tapered annual allowance is an absolute nonsense in my view,” Webb said, observing that “it’s further disengaging decision-makers in business from pensions”.
The former minister believes however, that parliamentary politics, and not policy, will be the decisive factor in any changes to the tax structure.
“Ultimately what will determine all of this won’t be pensions – it will be, ‘Is the government about to fall, how many cabinet ministers might resign, can we get a Budget through?’”
