How should the tax system treat pension saving? (Report on CIOT/IFS debate)

We are stuck with an arguably flawed system because, while there are many possibilities for change, the complexities of the various options and wide range of views about what might be done seem to scupper the chance of reform.

These were two of the conclusions from the CIOT/IFS debate, ‘How should the tax system treat pension saving?’ held in Central London on Tuesday 5 July.

Carl Emmerson, Deputy Director of the IFS (Institute for Fiscal Studies) was the first of four speakers. He argued that taxing income when received is a good basis for the tax treatment of pension saving.

Emmerson said that help towards saving into a pension could be better targeted at those otherwise at risk of under-saving for retirement. He suggested there is plenty of scope to improve design of the tax-free lump sum, national insurance treatment of employer contributions and the treatment of pensions at death.

Glyn Bradley is Principal, UK Wealth (Policy, Professionalism and Research) at Mercer and a member of the CIOT Employment Taxes Committee. Speaking in a personal capacity, Bradley used charts of marginal tax rates to show how people in different income brackets can reduce taxation they pay by putting money into a pension. He questioned why the tax regime generally gives the highest incentive to save into pensions to people with the most money.

Bradley also highlighted some peculiarities that marginal rates of relief vary widely within certain income brackets and queried whether this was truly the policy intention. He put forward an idea that if the Government made changes to cut tax relief, the savings might be diverted to increase the state pension.

Kelly Sizer, Senior Technical Manager at the CIOT’s Low Incomes Tax Reform Group (LITRG), gave her ‘wish list’ for complexities to avoid in any future pension system in the UK. She said we need equivalent savings into a pension for everyone. Here she welcomed the government commitment to act on the Net Pay v Relief at Source anomaly.

Sizer argued for clear and understandable rules and greater consideration of interaction of pensions with welfare benefits. Here she pointed out in response to Glyn Bradley’s presentation that marginal rates of relief for those on lower incomes need to also consider the impact of pension savings on welfare benefit claims. She also called for consistency.

Charlotte Clark is Director of Regulation at the Association of British Insurers (ABI) and was formerly head of pensions at the Treasury and Department for Work and Pensions. She argued that there is no such thing as a ‘pension tax system’, rather that in the UK we have a separate pension system and tax system, and these are each trying to do something different, both with separate people involved and using different levers. That is why it is difficult to reform pensions, she said.

Clark went on to suggest that we cannot talk about incentivising pension saving when many people do not understand tax relief on pensions, so arguably it is not an incentive, it is a reward. People would have to understand it for it to be an incentive.

During a Q&A session, Clark said pensions reform was high on the political agenda pre-covid but less now because any anticipated Exchequer savings look less worthwhile compared to mountain of pandemic-related public debt. She also remarked that making changes in this area is very difficult and that it is hard to produce solutions that everyone agrees are fair because people have different definitions of what is fair.

Sizer suggested that the expected long-overdue movement on Net Pay v Relief at Source indicates wider or major pension reform is in the long grass.

Bradley said he found it strange that we tax income from employment more than other sources of income. Emmerson suggested we just tax at the point people enjoy the money. He added it is fairer to tax people who are getting higher returns.

Asked if we should scrap tax relief on pensions entirely, replacing it instead with an ISA-style system, Clark argued that the focus should instead be on reinforcing that pensions should be about providing an income in retirement rather than accumulating a pot of wealth.

An audience poll during the debate asked what one change to the taxation of private pensions people would make. A third of respondents said to restrict up-front income tax relief to a single rate (which was the most popular answer) while just eight per cent said reform the tax-free lump sum.

Mubin Haq, CEO of abrdn Financial Fairness Trust, chaired the event.

A recording of the event is available here.

Report by Hamant Verma, CIOT Senior External Relations Officer