Pension tax relief has become increasingly topical with the amount of tax relief and its focus being debated. The Association of Consulting Actuaries (ACA) has significant concerns that further reductions will be made to pensions’ tax relief whichever party or parties form the next Government and that the changes will be placed on an already overly complex system. In a letter[i] to all of the political parties enclosing a paper[ii] published today, the ACA sets out the complexities and anomalies that tinkering with the framework time after time has caused. It calls for a collaboration between the political parties and the Pensions Industry to create a sustainable pension taxation system that can be readily understood and can properly incentivise retirement savings.
The paper’s main recommendations are:
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There should be no “knee jerk” changes to the pension taxation system after the General Election. The ACA notes that even a reduction in LTA might look a simple change – but it brings a new range of individuals into a potentially complex net and creates a new “protected case” for schemes to have to deal with – so its impact should not be underestimated.
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The next Government should initiate a fundamental cross-party review of the Pension Taxation system working closely with employers, pension providers, consultants and administration providers to ensure the new system is practical.
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The review should ensure that full details of the current reliefs, and their distribution between various constituencies, are understood.
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Changes to Pension Taxation should have cross-party support so that any new framework can endure.
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Any new framework should be given an appropriate lead time so that those who manage schemes can change systems appropriately and employers and individuals can plan properly for any new change.
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Once in place the new framework should not have any changes made to it for many years.
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The ACA paper says any significant reduction to the amount of tax relief granted on contributions could lead to a withdrawal from pension savings which is counter to recent Government policies, such as auto-enrolment, which are designed to encourage greater participation
Commenting on the paper and letter to political parties, David Fairs, Chairman of the ACA said:
“We believe it is critically important that there are meaningful incentives to employees and employers to encourage retirement saving and to cover potential costs of long term care. Reaching old age with adequate retirement savings provides employees and employers with choices which are not otherwise available. There have been various indications that relief might be reduced – we would ask the political parties and next Government to think very carefully about current reliefs and the long term impact of any reduction. In particular, it is important to understand fully the extent of the current reliefs, and how they are distributed, before making any changes.
“Constant chipping away of tax relief undermines faith in the system and erodes the belief that saving for old age is appropriate. It is inconsistent with the new Pension Schemes Act, broadly supported by the parties, which is intended to be the foundation structure for future pension savings.
“We have been concerned for some time about the complexity of the current pension tax system and we believe that very few people, even those working in the pensions industry, fully understand its many nuances. Our members intervene in many cases where pension benefits and the tax paid would otherwise not be determined in accordance with the law – and it is clear that there are many similar cases which go by unnoticed.”
The ACA says the complexity results in individuals being put off saving for retirement, employers are deterred from establishing and maintaining pension schemes beyond the minimum enforced by auto-enrolment; and, for individuals who do save diligently (and for employers supporting this), the costs of ensuring compliance with current tax law means ultimately that there is less money available for retirement savings.
“We hope the paper will spark debate and encourage suggestions on how pension taxation could be reformed. In our letter to the political parties, we have called upon them to support the establishment of a formal review of pension taxation, working with all interested parties involved in pension provision to make it an easier system to understand and operate within but, more importantly, that there is a clear and unequivocal incentive to save for retirement,” said David Fairs.
The ACA paper Creating a sustainable Pensions Tax Framework is available below
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