The Association of Consulting Actuaries (ACA) has urged the chancellor to commit to a "full-scale, careful review" of the pension taxation regime in the Budget on 11 March.
In a letter to chancellor Rishi Sunak, seen by PP, the trade body said that, due to "constant whittling away over recent years", the current regime was now unfit for purpose and needs review.
It said the regime's complexities, together with the confusion they cause, is leading to unintended behaviours and blocking reasonable benefit options in defined benefit (DB) schemes.
ACA chairwoman Jenny Condron wrote: "We believe that any review should be fundamental, with cross-party support, and should be well-considered rather than rushed, so avoiding unforeseen, unintended or unreasonable consequences to particular groups of pension savers."
Condron added: "You will be aware of the emerging huge shortfall in retirement savings that many will face in the future and we believe that any review should be framed against this background. Failure to address this will result in increasing demands on the state in the medium and long term. Any new regime should lead to adequate pension savings for the majority - whether employed or self-employed - and to do so, the targeting and timing of reliefs needs to be considered."
The ACA added that the oft-quoted cost of existing tax relief has been described as "eye watering" but noted it needed to be remembered the quoted figure includes a sizeable contribution targeted to make up deficits in DB schemes for accrued promises and do not represent relief incentivising ongoing savings.
Evidence of employer frustration
The ACA's 2019 survey of employers of all sizes found 75% of employers want the pension tax regime to be simplified with 67% saying more help should be targeted on lower earners even if this means reducing relief for higher income groups.
Its research also found 69% want the tapered annual allowance to be abolished, even if this would mean a reduction in the general annual allowance.
The letter continued: "It is apparent that many employers in both the private and public sectors (not just NHS employers) are now deeply frustrated with the damaging impact of the tightening of pension tax reliefs in recent years through lower annual and lifetime allowances, and the complexity that this has introduced, compounded by the confusion and unintended consequences that the tapered allowance has added.
"This frustration is also shared by the self-employed who do not necessarily have uniform cash flows and can only save when the opportunity presents. The present pension tax system makes such saving near impossible."
The costs of complexity
The ACA said present complexities result in many being put off saving for retirement and also deter employers from establishing and maintaining pension schemes for their staff beyond the minimum required by auto-enrolment.
It said: "Costs, entirely the result of the current complexity, include extra advice and implementation costs for schemes and hence sponsoring employers; and employees need to take specialist advice even to fill in their tax returns let alone to make decisions."
A way forward
In its response to the last review of pension taxation in 2015/16, the ACA identified some characteristics it said would guide a solution to a better pension tax regime in future. It said the following still held true:
• The new regime should continue to explicitly incentivise individuals to save for retirement while they are working and importantly should encourage employers to make suitable arrangements for their employees;
• A new regime should replace the current regime - it should not require creation of two separate regimes to run in parallel dealing with past and future savings;
• The new regime should be simpler to understand and operate than the existing regime; where it cannot be simpler it should at least be fairer and intuitive, with anomalies and perverse outcomes eliminated;
• The new regime should be capable of targeting tax relief in line with the government's intentions.
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