Would flat rate pension tax relief undermine savings rates?

Savings rates have been too low for too long (Source: Getty)

Matthew Brown, private client partner at Thomas Miller Investment, says Yes.

If the chancellor moves to a flat rate of pension tax relief, it will be for one reason and one reason only – to reduce the “tax leakage” that the Treasury sees from pensions. Why else would he be considering the proposal? The fact is that people are not saving enough for retirement but a flat rate will do little, if anything, to encourage extra savings from basic rate taxpayers. Modern life is expensive and many people will just about make ends meet at the end of the month – a few more pence tax relief will not encourage great swathes of additional pensions saving. Moreover, it will affect those higher rate taxpayers who actually have the disposable income to make extra retirement provision. For this group, extra pension contributions will undoubtedly look less attractive. This is not to say that people will not continue in their workplace pensions – it will make clear financial sense to do so. However, they will be far less likely to make additional pension savings and, therefore, we will see far lower savings rates.

Richard Parkin, head of retirement at Fidelity International, says No.

The current system of tax relief is increasingly seen as unfair. A big reason for this is that many who get tax relief at 40 per cent only pay 20 per cent tax on their pension income in retirement. This gives them an effective government subsidy of 42 per cent on their pension contribution, while a basic rate taxpayer gets a subsidy of only 6 per cent or so. A flat rate would go some way to addressing the unfairness as it would provide the same up front incentive to all. However, it is not completely fair since the overall effect will depend on how much tax people pay in retirement. For example, a government bonus of £1 for every £3 saved would give a pensioner on basic rate tax an effective subsidy of just over 13 per cent, but one paying higher rate tax would actually end up losing 7 per cent of his contribution as tax. So while flat rate relief is fairer, we need to make sure that we deal with any losers under the system so as not to undermine the overall effectiveness of the approach.

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