Pensions - Articles - PwC: More steps required to modernise pensions tax system

 A poll this month commissioned by PwC reveals that 45% of UK adults saving into a pension scheme consider tax incentives to be an important factor. The poll shows 15% of UK adults saving into a pension scheme do not know what the tax incentives are. Most UK adults (65%) do not feel they understand well how workplace pensions are taxed.

  

 Raj Mody, pensions partner at PwC, said: “The current tax arrangements for pensions savings are clearly not simple nor intuitive to understand. One challenge is the way that tax reliefs work, a concept which just doesn’t seem to have the same impact as more direct top-up incentives or bonuses. Pensions auto-enrolment communications had started to address this, and LISAs will take the idea a step further with explicit bonus payments.

  

 “One particular area which would benefit from simplification is the current pensions Annual Allowance taper for people earning between £150k-£210k a year. It is fiendishly complicated, for the individuals affected and for companies trying to manage their pension arrangements, and affects more people than just those in that earnings range. There is a risk that a hugely complex system may disengage a segment of the population, including company senior management, from retirement saving.

  

 “The Chancellor could look to simplify the Annual Allowance taper considerably. Alongside this could come a change to the way tax relief works for pension savings, for people of all earnings brackets. This could be presented more cleanly as a top-up incentive, LISA-style. It would be another step towards a reformed pensions tax system, and convergence of pensions and LISAs.

  

 There are still loose ends on LISAs, scheduled to be introduced from April 2017, which the Government could address. PwC’s consumer poll reveals that most UK adults (75%) don’t feel they understand how LISAs work, with only 25% feeling they understand them quite well or very well.

  

 Raj Mody, pensions partner at PwC, added: “I would expect, in due course, a bigger and bolder LISA - but whether the new Chancellor will choose now as the time to announce further changes is unclear. Within the LISA framework there could be wider opportunities for withdrawals, not just under the currently envisaged tight constraints for first-time purchases up to certain property value limits. Employer contributions could also be integrated into the LISA framework.

  

 "What is important is that the Government considers how auto-enrolled pension savings, ISAs and LISAs interact from the perspective of the consumer. The Government may well have a strategy for how the products work for different parts of the population, but an individual saver sees it all. The range of options available can clash and cause confusion. It is a tough choice for any individual employee to make the trade-off between the value of additional employer contributions and tax reliefs for their auto-enrolment arrangement, versus the potential greater flexibility which LISA provides and the simpler bonus incentive.

  

 “It doesn’t just matter what the facts are for how all these arrangements work, it also matters how much people understand them.”