The Office of Tax Simplification (OTS) has called on the government to review its “complicated” pension tax measures and simplify engagement with the system.
In a report released yesterday (10 October), the OTS made a total of 15 recommendations around issues including tax relief provisions and retirement saving challenges.
These include a call for the government consider removing or reducing the difference in outcomes between ‘net pay' and ‘relief at source' pension arrangements.
While employers have the choice of providing either arrangement to their staff, those with an income below the personal allowance remain worse off in a net-pay scheme, as no tax relief is granted, whereas this would be the case in a relief-at-source scheme. Many of the biggest master trusts use a net-pay structure.
The OTS said: "The government should consider the potential for reducing or removing the differences in outcomes between net-pay and relief-at-source schemes for people whose income is below the personal allowance without making it more complicated for those affected."
Royal London director of policy Sir Steve Webb said the recommendation, if followed, could stop lower-paid workers missing out on pension tax relief altogether.
He added: "This report makes a great deal of sense and has highlighted areas where the tax system causes complexity and unfairness for ordinary taxpayers. Ideally, the government will listen carefully and make some changes."
The OTS said the government must also reconsider the impacts of the annual allowance, lifetime allowance, and money purchase annual allowance (MPAA), "taking account of the distortions they sometimes produce".
It stated: "The government should continue to review the annual allowance and lifetime allowance and how, in combination, they deliver against their policy objectives and review the operation of the MPAA, gathering better evidence, considering whether it also meets its objectives, and is set at the right level and is sufficiently understood."
The government paid out £36.7bn in tax relief on pension and national insurance contributions in 2016/17, but this remains disproportionate for higher-paid workers in defined benefit schemes, despite recent reforms.
The OTS said: "Some employers have to pay an annual allowance charge which reduces pension entitlement; the calculations are complex and it is difficult to ever predict whether the allowance will be exceeded.
"Those in defined contribution schemes face uncertainty about whether and when the charge will apply as it depends on the value of funds in the market, which again is inherently unpredictable."
AJ senior analyst Tom Selby said the recommendations highlight the "nightmarish complexity" of the system.
He said: "It is frankly bizarre that savers now have to get their heads round an annual allowance, MPAA, tapered annual allowance and lifetime allowance, all of which could apply to people at different stages of their life."
"We know this complexity puts people off pensions and the government now needs to put simplification at the heart of its savings agenda. Rather than looking at these issues in isolation, policymakers should convene a commission tasked with simplifying the system and encouraging more people to save for retirement."
The impact of the tapered allowance has been starkly issued this year with many higher-paid public sector workers facing punitive tax charges for breaching the cap, which reduces by £1 for every £2 earned over £150,000. This has, for example, led senior NHS clinicians to cut their working hours in order to avoid breaching the allowance. The government is now looking at introducing flexibilities into the scheme.
The OTS added: "In recent years the government has reduced the overall level of tax relief available for pension saving, yet the way these work is complex and, in certain situations, can lead to disproportionate outcomes."
It has recommended HM Revenue & Customs (HMRC) ensured clearer guidance on the tax issues is available through greater focus on tax education and literacy.
Webb concluded: "In the past, HMRC has treated OTS recommendations with contempt, ‘marking their own homework' and deciding that nothing needs to change. I hope that this time the watchdog will have some teeth and the government will listen."
Recommendations on pension savings
- The government should consider the potential for reducing or removing the differences in outcomes between net-pay and relief-at-source schemes for people whose income is below the personal allowance, without making it more complicated for those affected.
- HMRC should play a full part in helping to ensure that guidance on the tax consequences of particular pension arrangements and choices is available and clear to all concerned.
- The government should continue to review the annual allowance and lifetime allowances and how, in combination, they deliver against their policy objectives, taking account of the distortions (such as those affecting the NHS) they sometimes produce.
- The government should review the operation of the MPAA, gathering better evidence, considering whether it meets its policy objectives, is set at the right level and is sufficiently understood, given the present potential for disproportionate outcomes
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