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Three key reasons why the Chancellor should opt for a flat rate system of pension tax relief

Ahead of the Budget in March, the ABI is outlining why a new ‘Savers’ Bonus’, or single rate of tax relief, would produce a simpler, fairer and more sustainable system for pension savings, and would encourage people to save more for retirement.

The ABI first called for reform to higher rate tax relief in 2013. In its response in October 2015 to the Government’s Green Paper on ‘Strengthening the incentive to save’, the ABI proposed the Savers’ Bonus, a single rate of pension tax relief. Not only does this approach build on the Freedom & Choice reforms, but also seizes the current once in a lifetime opportunity to make the tax incentives for pension saving fit for purpose.

The ABI also acknowledged that meaningful reform of the present system would be a credible approach but that a move to the so called Pensions ISA, ending up front tax relief but making retirement income tax free, would have very damaging long term effects on our economy.

Three key reasons for a Savers’ Bonus:

1. Simplicity

  • A Savers’ Bonus for all earners would be simpler than the existing system of different rates of relief for different earners.
  • A flat rate of 25% or 33% could be presented as a top up of £1 for every £2 or £3 that savers contribute, making savings much more visible and simple to understand for both workers and employers.

2. Fairness

  • A Savers’ Bonus would provide significant help for low and middle income earners, who are currently under-saving, to build up a bigger pension pot by ensuring Government support for their retirement saving.
  • The current system benefits the wealthiest savers the most, who are fortunate enough to pay a higher amount into their pension.
  • Currently, basic rate earners receive less than 30% of what the Government spends on tax relief, but under a flat rate, they would receive almost half.
  • At the moment, basic rate taxpayers only get £1 for every £4 put in, while higher rate payers get £2 for every £3 put in, but a Savers’ Bonus would top up pensions equally for all savers.

3. Sustainability

  • A single rate would enable the Exchequer to make fiscal savings easily and sustainably, bringing in approximately £1.3bn a year from Defined Contribution pensions alone.
  • A Savers’ Bonus does not rely on tax receipts being brought forward, so savings are sustainable over the long term, and do not increase liabilities for future governments.
  • With an ageing society, a single rate is sustainable since it ensures that the increasing number of retirees, remain taxpayers.

Yvonne Braun, ABI Director of Long Term Savings Policy comments:

Yvonne Braun"The Savers’ Bonus would provide a massive boost to the average worker’s savings who is in most need of help to build their retirement pot. Despite the fact that basic rate taxpayers account for the vast majority of savers, they currently receive less than 30% of government spending on tax relief for pensions.

"The ABI has long called for reform to the pension tax relief system to ensure that the maximum number of people, especially those on low to middle incomes, save for their retirement. A Savers’ Bonus is the best option available to Government to encourage people to save and ensure they have a pension pot large enough for potentially significant costs during retirement. A single rate of tax relief would be simpler, fairer and more sustainable or all savers.

"Taxing people’s pension contribution upfront risks putting people off making provisions for their retirement, and would significantly damage our economy in the long term by shifting the entire tax burden onto the working age population.

"Overall, introducing a single rate of tax would benefit future generations, ensuring that we do not create long term fiscal problems for the sake of short term policy gains."

Last updated 01/07/2016