In defence of the tax relief status quo

There were strong indications that George Osborne was going to cut tax relief in 2015, but this never materialised.

The case for reform has been well made by various bodies, notably the Centre for Policy Studies. However, there is a good case for leaving tax relief well alone.

There is no noticeable appetite among employers, trustees or – most importantly – pension scheme members for a radical change to the approach to pensions tax relief

The original purpose of tax relief was simple, and often overlooked in this debate: it is to avoid double taxation.

Income that is put away for pension saving will eventually be taxed when the pension is put into payment. Not to give tax relief on employees’ pension contributions would therefore result in the same income being taxed twice.

The fact that higher rate taxpayers benefit more from the relief is therefore a red herring. By the nature of a progressive tax system, where higher earners pay higher tax rates, they inevitably have more to gain from any tax relief.

Double taxation disincentivises saving

The relief does work as an incentive to saving, consistent with public policy. Most pension schemes mention it in their literature.

If explained properly, it is not difficult to understand. Any part of an employee’s income that is paid into a registered pension scheme is untaxed, with the amount that would have been taken in tax instead going into the pension scheme.

Simple concepts that do not constantly change are exactly what we need if any confidence in the pension system is going to be maintained.

There is no noticeable appetite among employers, trustees or – most importantly – pension scheme members for a radical change to the approach to pensions tax relief. Quite the contrary, in fact.

Annual allowance is a mess

The above is the case for defence of the status quo. There are of course fiscal and political considerations that may overpower it.

These were recently set out by the Treasury select committee, although the government’s response acknowledged that there is no consensus over any reforms.

If anything is to be reformed, it should be the lifetime and annual allowances. The latter has been adapted and built upon so many times (tapering, the money purchase annual allowance, etc.) that it is creaking.

The lifetime allowance is complex and arguably not needed with the current lower annual allowance. Trustees, employers and members would all appreciate it if the existing system can be simplified, not redesigned yet again.

Christopher Stiles is a director at law firm Gowling WLG