UK pensions: Shift to a flat rate of pension tax relief would cause a retirement crisis for millions in the squeezed middle

Hayley Kirton
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A capped rate would be much more practical than a fixed rate, argues Hymans Robertson (Source: Getty)

A move to a flat rate of pensions tax relief would adversely affect savers in the squeezed middle who are paying at the higher rate tax bracket, causing a retirement crisis by discouraging them from saving, a pensions consultancy has today warned.

"A move to a flat rate of tax relief redistributes tax relief away from additional rate taxpayers, which is justifiable as they tend to save enough," said Chris Noon, a partner at Hymans Robertson. "But, it also takes tax relief away from higher rate taxpayers, which is a problem as this is the group facing the biggest savings shortfalls in retirement."

Last month, the Financial Times reported that chancellor George Osborne could be planning to announce a shift to a flat rate pensions tax relief in next month's budget, with the new rate set somewhere between 25 and 33 per cent.

At present, relief is applied at the same rate that people pay income tax.

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Instead, partners at Hymans Robertson are proposing that it would be fairer to move to a capped rate of relief, whereby the highest rate available is limited to 33 per cent, which would apply to higher and additional rate taxpayers, but basic rate taxpayers would still only get a 20 per cent relief rate.

"Of all the options on the table for government, modifying the current system to bring in a capped rate of tax relief will represent the smallest disruption for the greatest policy benefit," said Patrick Bloomfield, a partner at Hymans Robertson. "It would also enable the removal or at least a simplification of the complex system of annual and lifetime limits. It’s a simpler and fairer policy than introducing a flat rate."

Noon added:

"A capped rate would provide a better approach for employers in managing retirement provision. Both they and the pensions industry are still adjusting to the changes heralded by the pension freedoms less than a year ago. The infrastructure is largely in place to implement a capped rate of relief. Introducing a flat rate, on the other hand, would create considerable upheaval and cost."

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Others have previously cautioned that the complexities in the changes to annual allowance could put people off saving. This April, the current annual allowance of £40,000 will be reduced on a sliding scale to £10,000 for those with a total taxable income of over £150,000.

Last December, professional services firm PwC warned that these changes were proving so problematic that 26 per cent of employers were already reviewing the role pensions played in in their reward packages.

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