PPI proposes 30% single rate tax relief to boost saving

THE PENSIONS POLICY INSTITUTE (PPI) has suggested a single rate tax relief of 30% would encourage more basic rate taxpayers to save for retirement with little cost to the government, Accountany Age’s sister title Professional Pensions reports.

Low earners pay around 50% of pension contributions but receive just 30% of tax relief, while higher earners make 40% of total contributions and receive 50% tax relief.

PPI director Chris Curry said: “While recent reforms have reduced the cost of tax relief, they have not increased the value of saving for an individual.

“More radical alternatives, such as a single rate of tax relief applied to all pension contributions, could spread the advantages of tax relief more evenly.”

The estimated cost of tax relief on pension contributions under the current system is around £35bn and introducing a single rate would amount to a similar cost, the PPI explained.

Alternatively, a single rate at the basic rate of income tax could cost £22 billion, or up to £50bn if it was based at the higher rate of tax.

Partnership chief executive Steve Groves said: “The 30% single rate option for pensions tax relief can really make pension savings more effective and attractive for the majority at a limited cost to the government.”

However Hargreaves Lansdown head of pensions research Tom McPhail described the proposal as “complicated”.

“The PPI report does a very thorough job of analysing the tax implications of changes to the rules. However, it does not include any qualitative analysis of possible behavioural responses to changes to the rules,” he said.

“This would have to be explored in considerable depth before any tax relief changes could be contemplated.”

Institute and Faculty of Actuaries (IFoA) president David Hare believes the report is a “worthwhile” first step but highlighted how tax is only one aspect of the pension saving decision.

“Most pension saving is already made via employer sponsored provision and this will increase under auto-enrolment,” he said.

“It would be interesting to examine how removing complexity and using tax incentives to reduce costs could encourage employers to wholeheartedly embrace pension provision. A simple regime that is easily understood could have many benefits for both employers and employees.”

Related reading