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Overhaul of pension tax relief proposed

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The Royal Society of Arts is proposing reforms to the current system of pensions tax relief, including a flat rate of tax credits and incentives for the self-employed.

The headline proposal in ‘Venturing to Retire’ is a flat rate top up from the government set at 30%. The package also proposes the creation of a body to promote financial security for the self-employed.

Other initiatives include giving individuals the right to continue contributing to a pension after leaving employment and the creation of ‘side-car’ short-term savings accounts alongside pension auto-enrolment.

Tom McPhail, head of policy at Hargreaves Lansdown, said the idea of moving to a flat rate had been well-tested and would garner support in many quarters. However, he added: “Pension taxation is notoriously complicated and any move to reform the central pillar of the system would necessitate a more comprehensive review of the multitude of quirks and wrinkles which bedevil pension planning. I’m not sure the government has the appetite for that right now.

“The inertia which has made auto-enrolment such a success also causes significant engagement challenges. Once someone has a pension they should be allowed to keep it from job to job, with the right to ask a new employer to pay money into an existing arrangement. Most self-employed people start their working lives in employment so we have a crazy situation where they are being enrolled and then the pension system lets them go. By putting individuals in control of their own pension we would incentivise pension providers to look after them and keep them engaged when they go self-employed.”

Steven Cameron, pensions director at Aegon, said a flat rate would address concerns that higher earners are getting a greater incentive than those paying basic or no income tax: “A move to a flat rate of tax relief of 30% for everyone would benefit those paying basic or no income tax but would reduce the incentives for higher earners to save for their retirement through pensions.

“One challenge is raising awareness of how tax relief works and a flat rate of 33% scores highest here, as the government is adding £1 for every £2 from the individual. However, the rate is likely to be set based on not costing the government extra money. Anything below 30% risks making pensions unattractive to higher and additional rate taxpayers. The complexity of introducing a flat rate across all forms of pension is its biggest downside and shouldn’t be underestimated.”

John Wilson, head of technical at JLT Employee Benefits, said the current system is complex, often targets the wrong people and can promote inequality, but added: “Before the industry and the government go rushing headlong into overhauling policy around pensions tax relief, it is important for all stakeholders to think critically about how changes made now may impact an entire generation of savers, particularly those saving for the first time under auto-enrolment.”

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