Our government should be looking at tax policy that will increase the future wealth our citizens hold in pensions, not policies that will likely accelerate the current general decline in pension savings.
For as long as I can remember the run-up to every chancellor’s Budget has seen widespread speculation that higher-rate tax relief on pension contributions would be removed and result in enormous savings for the Treasury.
This year is no different; rumours already abound. So far it has never happened and fears have been unfounded, but the Budget this year is clearly going to be quite unlike any since the early 1970s.
The basic principle of voluntary pension saving is that income tax is not paid on deferred earnings, but rather on the income paid out as a pension. You pay your income tax when you draw your savings as income.
The one marked difference to that is the tax-free cash that applies to a portion of UK pension savings, which can be described as EEE (tax exempt on entry, growth, and exit). That to me is the one true benefit of long-term pension saving and should be seen as a reward to pension savers for deferring income over many decades, both for their own benefit and the general good.
The removal of higher-rate tax relief on pension contributions would mean people who pay the higher rates of tax would effectively be taxed twice on their pension savings: once when they defer income and save it and again when they finally draw their savings as income.
No one in their right mind would voluntarily save in a system that taxes them twice for the privilege of saving. The removal of higher-rate tax relief would mean it would only be sensible to save in a pension while you are a basic-rate taxpayer.
Higher-rate taxpayers can afford to pay a bit more in tax, but there is more to this issue than that in a pension system where saving is largely voluntary.
Today’s pension landscape sees ever-decreasing annual and lifetime limits on pension saving, and ever-changing labyrinthine rules and regulations making it practically impossible for people to even understand, let alone control, their pension savings.
The simple act of deferring income for much later in life has become a quagmire of red tape that very few can negotiate without expert financial advice. That is plain crazy when what is really required is a simple system based on simple principles and that is not subject to constant change.
Such a system would be better still if employers could also be given additional tax incentives on their own pension savings based on the coverage and pension contribution levels of their employees.
A system based on mutual self-interest of both employers and employees would likely lead to a thriving pension system once again, this time based on the recent auto-enrolment reforms that have extended workplace pension schemes to most UK employees.
Steve Bee is director of Work Life Benefits
Before publication, this article should have been updated to reflect the government’s announcement on 23rd September that there’s not going to be a budget this year.