The UK’s system of pensions tax relief needs to be overhauled to make it fairer to the lower paid and younger savers, the Association of British Insurers (ABI) says.
The report - Tax Relief on Defined Contribution Pension Contributions, commissioned by the ABI and conducted by the Pensions Policy Institute (PPI) - found that, while basic rate taxpayers make up 83.4% of total taxpayers, they only receive 26% of the pensions tax relief related to defined contribution (DC) pension contributions.
It also noted that the system also benefits older people more - saying that while 42% of people who contribute to a DC pension are under 40, they only receive 27% of the available tax relief. The report added that people in their 40s and 50s receive two and half times as much tax relief from the government.
The report also found that men received the most tax relief, something that exacerbated the gender pensions gap - noting that 71% of DC tax relief is granted to men as they pay 69% of the contributions.
The research is the first of its kind since the 2016 Pensions Review and found tax relief could be distributed more fairly. According to the PPI, changing the current system to a single rate would increase the amount of pensions tax relief for the basic rate taxpayer from 26% to a more equal 42%.
The findings will inform the ABI's wider policy work on simplifying pensions tax relief. The current pensions tax relief system is too complex. Years of tinkering have made it difficult for savers to plan for the long term. A change to the system is needed so it is simpler, fairer to all earners and encourages saving for retirement.
ABI director of long-term savings and protection Yvonne Braun said: "Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.
"We hope the research will provide food for thought on how to make the system simpler and fairer."
PPI head of modelling Tim Pike agreed: "While automatic enrolment has significantly increased the number of low earners benefitting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more. A change to the system of tax relief on DC pensions could offer an opportunity to address the philosophy of the current system although implementation would present challenges."
Smart Pension director of policy Darren Philp agreed the system needed to be reviewed to make it fairer. He said: "Our tax relief system is broken and has been for some time. The government needs to step back and review the system to make sure tax relief is targeted and supports people fairly in saving for the longer term. Reform won't be easy, and will create winners and losers, but now's the time to grasp the nettle and deliver a system that supports future savers and delivers value for the amount spent."
Society of Pension Professionals president James Riley agreed that change wouldn't be easy. He said: "The well-publicised problems with doctors' pensions have already shown that the UK pensions tax situation is clearly far too complex but, as the ABI notes, changing it will be far from easy.
"In short, pensions tax needs to be simplified. Doing this properly however, will take time, careful planning and cross-party consensus. We need to ensure that we end up with a robust pensions tax system that is fit for the long term (and isn't constantly tinkered with, as has been the case in the recent past). But we also need a system that is truly simple."
He added: "Any changes to the pensions tax system needs to maintain the amount of relief available to savers as a whole. Any tax grab, however attractive given the county's current finances, will simply exacerbate the already huge inequality between current pensioners and those now saving for retirement."
Pensions Management Institute president Lesley Carline agreed. She said: "Amending the rate of tax relief is all very well, but the rate itself is just one inequality and fairness requires us to address them all. Firstly, there is the relevance of tax relief to members of defined benefit schemes since there is no direct correlation between contribution rates and benefit accrual. Secondly, and probably the most pressing at the moment, is the anomaly between the net pay arrangement and relief-at-source for DC members who are low earners."
