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Budget 2014: pensions tax relief - time to stop the merry-go-round

Otto_blogx268x317With the Budget on Wednesday, minds turn to how to shave a little here and cap a little there to free up some funding for headline grabbing short-term giveaways. But the consequences can be major and long term.

Pension taxation is a case in point. The industry is not anti-change. But change has to be done to realise a long-term vision not just for short term expediency. This means we need a holistic look at the whole system to make sure it is fair and encourages people to save more for longer.

Some of our leading politicians have talked about reducing the amount of tax relief paid to higher income savers in order to fund new initiatives. There are also plans to look again at further reductions to the Lifetime Allowance, which has already been cut from £1.5m to £1.25m this April.

But politicians of all parties need to remember that the pension system is not just a money pot to be dipped into when politically convenient. It is made up of the savings of real people who have done the right thing and worked and saved hard all their lives for their retirement. These people deserve some certainty around what is going to happen to their money.

The current political pattern seems to be to freeze or reduce the limit, but still expect people to save more. This is a trend that cannot continue if we want people to be encouraged to build up a decent pension pot.

Automatic enrolment means millions more people are saving and we hope that they will keep saving all their working lives. Although the Lifetime Allowance sounds like the kind of money only the very rich could save up, that is not actually the case.

Government and industry can both agree we think people should save more into their pension but if they do that even people earning the average wage could find themselves reaching the Lifetime Allowance limit. The current political pattern seems to be to freeze or reduce the limit, but still expect people to save more. This is a trend that cannot continue if we want people to be encouraged to build up a decent pension pot.

As a result of auto-enrolment, employees will be paying 8% into their workplace pension through a combination of their own salary, employer contributions and tax relief. The recent DWP Command Paper on charges used an example of someone saving for more than 45 years when illustrating the impact of charge levels.

If the same employee increased these contributions to 11% potentially giving them a decent retirement income of almost 65% of their working salary (including the state pension) a person starting on £34,000 would hit the current Lifetime Allowance £1.25m ceiling. If the LTA was reduced to £1m - the current policy recommendation of one of the parties - people starting on £29,000 would be pulled in. These are not CEOs or millionaires. In fact our figures show that one in five people aged 22-29 could find themselves in this bracket.

If contribution levels went up to 14% - the recommended amount in a recent report from the Pension Policy Institute - people starting on £29,000 would hit the current limit, and those starting on £24,000 would hit a reduced £1 million limit. This is lower than the current average salary.

Do we really want a pension tax policy that penalises those people who save more for longer?

This is supposed to be the primary objective of our pension system.

People might think that of course the pensions industry would be standing up for the status quo on pensions tax relief but actually we are not. Last year the ABI called for reform to the pension tax system to help workers on lower and middle incomes secure their retirement. This was a big change for the pension industry which had previously supported keeping higher rate tax relief unchanged.

We would support changes which delivered for savers but we need to be honest about why these changes are being made and who they are going to impact. We cannot keep punishing savers for doing the right thing and expect people to retain faith in a system which encourages them to lock their money away, investing for their retirement if this sees their hard earned savings pot shrunk by the whims of the political cycle.

Let’s stop the merry-go-round and have the courage to make the tough choices needed to help future generations.


Last updated 29/06/2016