Most reforms for pension tax will make it worse for savers

The PLSA set out five principles for effective tax reform in a report which considers the separate impacts on savings, savers, and schemes

Most reform options for pension tax will leave many a number of savers with smaller pots and cause substantially more costs for schemes and employers, says the Pensions and Lifetime Savings Association (PLSA).

The trade body set out five principles for effective tax reform in a report published 24 February which considers the separate impacts on savings, savers, and schemes.

This comes ahead of rising contention over the range of problems caused by complicated tax relief and calls for a fairer system.

As outlined in the PLSA's five principles, an overhaul to the system must: promote adequacy by providing financial support and incentivising savings; encourage good behaviours and decision making; be fair and help the employed, the self-employed, and non-workers; simple to adopt and administer, avoiding transition and on-going costs for schemes; and enduring and sustainable to help build confidence in long-term saving.

None of the main options touted for reform achieve the five principles, the PLSA said.

Introducing major change to the system of fiscal support for pensions risks undermining hard-won confidence in pensions, warned director of policy and advocacy Nigel Peaple. This, in turn, could undermine the gains made in recent years, particularly through the advent of auto-enrolment and improvements in governance.

While the removal of higher rate tax relief might save up to £10bn each year, the PLSA said adequacy worries remained for savers paying the basic rate who would be left out of any changes.

It added that a move to a single rate would still likely bring considerable increases in costs to both employers and schemes, with a reform taking two to three years to be implemented and risking the end of defined benefit provision in the private sector.

Our assessment suggests that no single reform of the current system is perfect, said Peaple. The UK is facing a very severe economic and fiscal environment as a result of the pandemic; but any potential reforms should be fully thought-through and assessed.