HM Treasury
Strengthening the incentive to save: a
consultation on pensions tax relief
Response from
The Pensions Management Institute
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Response from the Pensions Management Institute to HMT consultation
“Strengthening the incentive to save: a consultation on pensions tax relief”
Foreword
The current regime of tax relief for registered pension schemes
dates back to the Finance Act 1921. This established the
principle of ‘Exempt, Exempt, Taxed’ (EET) in which
contributions to registered schemes and capital growth within
such arrangements are tax exempt and that emerging benefits
are taxed as earned income. For over ninety years there has
been consensus between the pensions industry and
Government that this system has played a vital role in
maintaining a stable and effective system of private pension
provision. Tax relief has been vital in providing an incentive for employers to provide
schemes and for employees to join and accrue retirement benefits
However, in recent years, there has been growing pressure for change. Critics have
noted that rules within the system have been too generous to high earners. By
disapplying the principles of a progressive taxation system, EET has served to grant
most relief to the wealthier members of society. As a result, recent years have seen
the introduction of constraints on the tax reliefs available to wealthier members.
Many have argued that constraints should go further and that, for example, relief
should be available only at the basic rate. An alternative argument, first examined in
a Pensions Policy Institute research paper, calls for a flat-rate system of tax relief.
Others have suggested more radical reforms. The Centre for Policy Studies has for
some years called for what would in effect be a merging of the tax regimes for
pensions and Individual Savings Accounts (ISAs). Crucially, this would involve
abandoning the EET tax regime in favour of the ‘Taxed, Exempt, Exempt’ (TEE)
model associated with ISAs.
Following last year’s easement of the decumulation options available to members of
Defined Contribution (DC) pension schemes, The Pensions Management Institute
(PMI) speculated that this might be the first move towards adopting a TEE model for
pension schemes, and in this year’s publication of HM Treasury’s consultation
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‘Strengthening the incentive to save: a consultation on pensions tax relief’ it became
clear that this was indeed an option considered by Government.
The principal concern of this consultation is the view that the current system of tax
reliefs is too complicated for the general public to understand. As a consequence,
the value of reliefs is unappreciated and so does not function as an effective
incentive to save in a registered pension scheme. Whilst this argument has its
proponents, it has also met vigorous opposition from many within the pensions
industry. Many argue that in an era of automatic enrolment incentivisation is no
longer crucial as members no longer have to give explicit consent to join a scheme.
Others have responded robustly to the criticism that the Treasury concedes too
much in tax relief to pension schemes. They note that most tax relief is granted in
respect of employer contributions to Defined Benefit (DB) schemes. As these
contributions are made at scheme level they do not favour high earners at the
expense of basic rate taxpayers. More importantly, these contributions are being
made to make good significant deficits in scheme funding.
This consultation has proved to be of great interest to PMI members. PMI is the
professional body which supports and develops those who work in the pensions
industry. PMI offers a range of qualifications designed to meet the requirements of
those who manage workplace pension schemes or who provide professional
services to them. Our members (currently some 6,000) include pensions managers,
lawyers, actuaries, consultants, administrators and others. Their experience is
therefore wide ranging and has contributed to the thinking expressed in this
response. Due to the wide range of professional disciplines represented, our
members represent a cross-section of the pensions industry as a whole.
PMI as a body does not hold opinions on matters of pensions policy (although its
members as individuals may do so). It is focused on supporting its members to
enable them to perform their jobs to the highest professional standards, and thereby
benefit members of retirement benefit arrangements for which they are responsible.
In preparing our response to this consultation, PMI surveyed its membership. The
survey attracted a total of 134 responses, and the input from our members has
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formed the basis of PMI’s response. The importance of the topic discussed is clearly
reflected in the strength of opinion shown in many of the comments made. Given
that the proposed changes would represent the most significant change to funded
pension schemes in over ninety years, this is to be expected. We can at least agree
that such significant reform requires careful thought before any major changes are
implemented.
Kevin LeGrand
PMI President and Chair, External Affairs Committee
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Executive Summary
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PMI members are not at all convinced that there is a link between perceived
complexities in the current system of tax relief and public reluctance to save
for retirement
Many members believe that automatic enrolment has proved an adequate
strategy for improving levels of private pension provision
PMI members see little need for any significant reform of the current system
of tax relief for pensions. Interestingly, this conservatism was more marked
among younger members than older professionals
There is very little enthusiasm for the proposed move to a TEE tax system
for pensions. There is almost unanimous agreement that such a system is
absolutely incompatible with defined benefit provision, and serious concerns
were expressed about its impact on defined contribution arrangements
There was broad consensus around modification of the existing system.
Many argued that for Defined Contribution (DC) arrangements the Lifetime
Allowance is essentially redundant and that the Annual Allowance alone is
adequate to control savings rates. Correspondingly, many noted that for
Defined Benefit (DB) schemes a Lifetime Allowance need only be used.
Many members favour the adoption of a flat rate of tax relief
Some members believe that pensions policy must be depoliticised and that
this objective can be most effectively achieved through the establishment of
a permanent pensions commission
Our survey (see below) asked members to comment on the proposals as a whole.
Comments from members included the following:
Any change reducing prospective pension pot will be a burden on the government
and society in the future. Current changes are complex enough for the industry to
absorb that it is virtually on a breaking point. Experienced staff is in demand along
with advanced computer systems.
At worst this is another disguised tax grab by the current government. If the
proposals of TEE are implemented there is no guarantee that a tax-starved future
government won't try to undermine them. Future pensioners may want to transfer
their funds to offshore jurisdictions on retirement to prevent such an eventuality. This
could prove very lucrative for insurers/asset managers/banks with operations in e.g.
the Channel Islands and the Isle of Man to name but two venues.
I cannot understand how a TEE system can possibly support the government's
objectives of getting people to save privately for their retirement. If there is no
incentive at the point they make a contribution, plus they could potentially be taxed
on the employer match, how will they feel about putting money away for their future.
In fact it could turn off people who are already saving and negate the purpose of
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long term savings vehicles. May as well just increase allowable contribution to an
ISA.
Whilst we have a national interest in balancing the books, the suggested move to
TEE would be a huge gamble. Yes it will give an instant shot in the arm for the
country's finances, but in future years we will be poorer for it. We should also reflect
on the fact that average pension funds are quite small and many individuals have
enjoyed an EEE system because their state pension and small private pension
income is below the personal allowance. Under TEE their funds will be even smaller
and they therefore not only would derive zero benefit for the TEE change they will
suffer as a result. Short-term politics/economics to set up another retirement income
crisis in the future!
The existing EET system is the most effective way of incentivising low/middle
earners to pay into a pension scheme and, once enrolled, to stay in rather than opt
out. Members of public sector schemes, in particular, need a period of stability with
minimum change to avoid their schemes becoming even more complicated than
they are already. In addition the recent sharp increases in employee contributions
mean that any move to a TEE basis and an implied reduction in net pay will lead to
a big increase in opt outs.
If the incentive is to encourage pensions savings amongst those who can afford to
contribute, then anything which reduces the incentive to ''middle' earners by
reducing higher rate tax relief must be a disincentive. Need to stop messing about
with the systems - this is the greatest disincentive of them all. Reach agreement set out rules and leave alone for a generation. DC pension from the current LTA is
too low a level - should be increased or civil service/MP's pension benefits should
be restricted to similar levels (that will make them think about it a bit more)
Pensions complexity is primarily due to factors such as how the money is invested,
the duration of the investment, the conversion rate of the pot into an income stream.
Tax relief is only a minor source of complexity and in fact I believe most people
understand the current system of tax relief. Giving people access to a smaller
proportion of their pot from age 40, say 25% of it, would encourage greater saving.
The information shown on annual statements is a major source of people's lack of
understanding of pensions and the perceived mystery and complexity around
pensions. Annual statements contain far too much small print. The FCA requires all
of the assumptions made in the calculation of projected fund value and income at
retirement to be shown. What they seemingly fail to recognise is that very, very few
people have the capacity to understand any of it, let alone the will to read it all. The
average pension member sees all that writing and becomes confused, disengaged
and switches off. In attempting to ensure people are properly informed (and
backsides are covered) the FCA requirements on what needs to be contained in
annual statements is actually making matters much worse than they need to be.
Hopefully a move towards online statements will reduce this problem.
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The Chancellor must be encouraged to take his time before making changes
ensuring the industry has adequate time to prepare and that the existing savings of
all are protected. His short term aim of a financial windfall is misguided and his short
term view damaging.
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PMI Response
We wondered if attitudes to the proposed changes would vary amongst different age
groups. For this reason, the responses to some answers have been segmented by
age.
We began by asking some general questions.
What is your age?
< 36
12%
36 - 50
44%
Over 50
44%
Which of the following best describes your role?
Age < 36
Pensions Manager / ‘in-house’ Administrator
62%
Age 36 50
47%
Age > 50
Consultant / Adviser
19%
29%
22%
Service provider (asset manager, platform
etc)
0%
5%
5%
Trustee
0%
5%
12%
Other
19%
14%
20%
41%
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Do you believe it is necessary for the tax relief system to be changed at all?
Age < 36
Yes
33%
Age 36 50
43%
No
67%
57%
Age > 50
50%
50%
Comments included the following:
(Age under 36)
not in a proposed form. Definitely not changing EET to TEE
The current regime is largely understood and provides a hassle free way to save.
Recent changes to pensions tax have already undermined the pensions system; and
further changes will cause more damage
The cost to the Treasury and the benefits of the current tax relief are
disproportionately skewed towards higher rate tax payers
(Age 36 – 50)
The desire to restrict tax relief for higher earners now over complicates matters. The
new tapered annual allowance is untenable for individuals or companies
Politically the cost of tax relief is an obvious target and until we get a firm settlement
then the risk is we will continue to tinker with it to the detriment of many.
The system is fair as it is - you pay tax at a given rate and get tax relief at the same
rate (unless you are low paid or a non-taxpayer where you can still get 20% tax
relief)
Tax relief is applied disproportionately across earners and costs the government too
much especially as auto enrolment bites. We need a system which is sustainable
and doesn't include constant erosion of annual or lifetime allowances which create
costly and unnecessary burdens on pension schemes
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On the one hand, I think the system of tax relief should be kept as an incentive to
save. However, apart from those with significant earnings, and therefore pension
savings (prior to the introduction of the proposed new AA rules!) who currently
receive tax relief and will pay tax on pension income at the 45% rate, and those at
the Basic Rate level (who will always be at this level), I suspect a number of workers
who currently receive 40% tax relief on contributions will only pay Basic Rate tax on
their pension income. This seems overly generous so perhaps there is an argument
to address the system.
(Age over 50)
The environment is so complex and subject to constant change that it is difficult for
anyone to plan for the future. A stable environment for the long term is required.
Relief has become far too complicated, particularly with the annual and lifetime
allowances and the proposed treatment of high earners. It would be much more
straightforward to remove both allowances and move to a single rate of tax relief,
say 30% for all earners.
The current system is confusing for many people. I do not believe that the majority
of people understand that the Government tops up their pension contribution. I also
believe that many people think they won't be taxed on the pension income above
25% of their pot.
This is a terrible idea which has been proposed for the wrong reasons. The
Chancellor needs to boost tax receipts as a consequence of truly reckless tax cuts
elsewhere and sees the pensions system as a cash cow.
The fundamentals of the current system are sound - it is the constant government
interference since A-Day that has introduced a myriad of complexities that have only
served to deter people from additional pension savings.
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Consultation question 1
To what extent does the complexity of the current system undermine the incentive
for individuals to save into a pension?
Survey question 1
To what extent does the complexity of the current system undermine the incentive
for individuals to save into a pension?
Age < 36
A great extent
7%
Age 36 50
9%
Age > 50
A partial extent
13%
25%
33%
A limited extent
47%
42%
35%
No extent at all
33%
24%
16%
16%
Comments included the following:
(Age under 36)
I don't think it is the tax system which puts people off. Trust in pensions and saving
is very important, and I feel that changing the system now will make people trust
pensions and saving even less.
Very few individuals paying basic rate tax show any interest/awareness of tax relief
on their pension contributions. Therefore not a question of being put off by the
complexity as not being aware of the system.
(Age 36 – 50)
People invariably understand the general principle and benefit of tax relief but the
one specific area which can cause some confusion is the different basis of relief
applicable to employee contributions in contract-based (relief at source) and trustbased (net relief) arrangements, although the extent to which this acts as a detriment
to pension saving is highly dubious.
The current EET system is simple and understood by the general public. The
complicating factor is the government's continual chipping-away at the tax-efficient
amounts people can save with an ever reducing LTA (and the relevant protections
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which come in each year to ring-fence what people have currently accrued) and AA.
The complexity of the way the system is administered should not been seen as a
failing of the inherent structure of EET.
It is not complex because it is logical - if you pay 40% tax, you get 40% tax relief.
Sure, contract based schemes mean positive action is needed to reclaim higher rate
tax relief, but it is not complicated and I have no experience after meeting 1000's of
members in my career that this is the case.
Tax relief is not an incentive for the majority of individuals. This is proven via auto
enrolment which shows that employer engagement is a bigger incentive. Tax relief
is of concern to high earners who may view pensions negatively, however statistics
show that many high earners do not recoup the additional 20% tax relief. It’s used
to sell products but in reality people don't bother to maximize it.
There will always be complexity in the system by virtue of the fact you are saving for
an income stream many, many years down the line. We don't know how a DC fund
will grow over the years and we don't know the rate of conversion of that fund into
an income stream since that will be based primarily on long-term interest rates and
life expectancy in years to come. These factors will always be at play, regardless of
tax relief. What a lot of people don't 'get' is how such a seemingly substantial pension
fund converts into such a seemingly small pension. The perceived poor rate of
conversion is, I believe, the major factor undermining people's incentive to save. Tax
relief may be a source of some of the complexity / confusion too, but I don't think it
is central to why people aren't saving enough.
(Age over 50)
As advisers to a relatively small proportion of the market, my firm does not have
specific evidence of individuals being discouraged from saving by the complexity of
the current system. However, as practitioners, we can confirm that that complexity
makes it more and more difficult to advise pension schemes and individuals
accurately and appropriately
The tapered Annual Allowance is the latest wrong idea from government
discouraging retirement provision. Every year pensions regulation gets more
complex and it is counter-productive. Even simplification made things more complex.
We don't need extra new changes, we need politicians to stop changing things.
Main disincentive is both the reduced scope through annual allowance, constant
tinkering by successive governments and the idea that no this government has its
eye on pensions as a source of tax revenue, it will never stop. What is the chance
that 'excessive' accrued rights/pots are next in line?
The complexity only really affects those that should be able to provide a suitable
level of retirement income without needing support from tax relief. Those with an
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income above £40,000 pa should not need as much help as those under £20,000
pa. The problem is that the boundary between qualification for State benefit support
and private levels of saving has become blurred.
Despite repeated attempts at simplification the constant tinkering is causing greater
and greater complexity. The government does not help the situation when it
introduces knee jerk changes. For example the message around Pensions
Freedoms is that "everything is really simple now" when in fact there is greater
complexity for most people.
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Consultation question 2
Do respondents believe that a simpler system is likely to result in greater
engagement with pension saving? If so, how could the system be simplified to
strengthen the incentive for individuals to save into a pension?
Survey question 2
To what extent do you believe that a simpler system would encourage greater
engagement with pension saving?
Age < 36
A great extent
17%
Age 36 50
5%
Age > 50
A partial extent
29%
30%
30%
A limited extent
29%
37%
35%
No extent at all
29%
28%
17%
19%
Comments included the following:
(Age under 36)
Simplifications tends to add complexity and I really cannot see how it could be made
more straight forward. Auto enrolment was a right move and it should be followed
without doing any more changes.
The proposed TEE system is not simpler
(Age 36 – 50)
You can only save what you can afford, but my sense is that people understand
ISAs more than pensions and will use these limits first, then pensions. The more
pensions look like ISAs with perhaps a minimum age for drawdown the more people
will save part of their money there.
A change in the system, and the subsequent likely press coverage, would probably
cause a short-term increase in engagement with pension savings but that
engagement is likely to be negative rather than positive if the change is the removal
of upfront tax relief as it would be viewed, quite rightly, as a tax increase (and,
particularly in the younger population who need the greatest encouragement to
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save, the promise of regaining that tax relief in a number of years is unlikely to be
believed) and thus it would act as a strong discouragement to pension saving. A
change which would encourage greater positive engagement with pension saving is
a change which did not have such significant negative consequences and did not
increase the overall complexity of pension savings (e.g. did not result in a split of
pre- and post- implementation pension savings or a different basis for DB and DC
pension plans); and/or a change which had positive consequences for the majority
of individuals, such as low to mid earners, and negative consequences only for a
minority of high earners (i.e. similarly to the positive reaction to the increase in
personal allowance).
The tax treatment of pensions is not a reason why people save, or not.
Fundamentally the principle of deferred income is difficult for low to moderate
earners to engage with. Changing the system to TEE would likely disengage the
people who see the tax relief on contributions as a benefit.
Anything which is simpler to understand is well received by savers, as long as it does
not disincentivises the saver. As soon as it becomes more expensive to save for
retirement, short term saving vehicles will appear to be a more attractive alternative,
which will result in inadequate savings for later life.
(Age over 50)
Amongst the higher paid who understand the incentive to save, a simpler system
could encourage greater savings. However, for the lower paid, the bottom line is
generally "what will it cost me each week/month" and therefore any simplification will
still need to focus on what it costs now.
Do not believe that it is complexity that is the issue here - in my opinion, most people
don't save for 3 reasons - don't see the need, can't afford it or save in a different way
because they don't trust the Government not to change the rules before they get to
take their benefits!
Stability is main requirement, with perception of pension as a good value product,
so more work on decumulation products. Every time a government figures trumpets
'rip-off charges' without addressing the specific area they mean, e.g. legacy
insurance books of business, the whole industry takes a hit, and savings are made
less likely.
The system is not overly complex currently despite what appears in the press.
Greater knowledge of the resulting benefit levels will improve the situation over time
but a more important factor is moderating the need for meeting current expenditure
out of future income.
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Survey question 3
Which of the following simplifications do you believe would encourage greater
engagement in pensions saving?
Moving to a TEE system with tax relief in the form of matching
government contributions (as with the Help to Buy ISA)
18%
Using just an Annual Allowance to control tax relief and
disapplying the Lifetime Allowance altogether
53%
Retaining the EET structure and moving to a flat-rate system of
tax relief
48%
No changes to the current system are required at all
19%
Other (describe below)
20%
Comments included the following:
Retaining the AA - if the rules can be kept simple and the rules don't keep changing.
The tapered AA is not workable and if the Government wants to restrict the value of
tax relief they need to find another way of doing this (perhaps only applying 40% for
higher earnings and not 45%?) Moving to a flat rate system sounds simple, but my
concern would be in the longer term that this would disengage higher earners. If
higher earners are disengaged the support to sponsor good quality workplace
pensions would wain which would affect pension savings for everyone.
Moving to TEE is unlikely to increase take up pension savings and could potentially
result in a dis-incentive to engage in pension saving. Individuals are more likely to
max ISA savings which have no access restrictions as opposed to locking away for
retirement.
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Consultation Question 3
Would an alternative system allow individuals to take greater personal responsibility
for saving an adequate amount for retirement, particularly in the context of the shift
to defined contribution pensions?
Survey question 4
Do you believe that a simpler system of granting tax relief to pension contributions
would encourage individuals to save more for their retirement?
Age < 36
Yes
42%
Age 36 50
28%
No
58%
72%
Age > 50
58%
42%
Comments included the following:
Any move to reduce prospective savings for retirement is a short term plan to fund
the deficit and not in people's interest
The system needs to be simple on the way in and when benefits are taken. The
biggest disincentive to pension saving was the requirement to buy an annuity.
However some simple controls are required on the pace at which funds are
withdrawn.
I think the concept of "pension saving" as opposed to any other savings is becoming
outdated - people need to "save" for when they no longer can or wish to work (or
move to part-time). People already know that but can only afford to save so much.
The tax system just dictates where you put whatever you can afford to save.
Fail to understand how government can expect individuals to take "greater personal
responsibility" for saving an adequate amount for retirement, when current levels of
'in-work poverty' mean many people (especially those supporting families) do not
have sufficient income to meet their typical monthly outgoings let alone contemplate
saving for their future retirement.
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Survey question 5
In the specific context of DC pensions, which of the following would help individuals
save more for retirement?
A TEE tax regime with matching contributions for Government
(as with Help to Buy ISAs)
23%
Continued use of automatic enrolment
74%
Auto-escalation to increase rates of contribution
74%
An effective system of aggregating small pots (e.g. ‘pot follows
member’ or the aggregator scheme)
51%
Easements to allow early access to savings in specific
circumstances
44%
Other
17%
Comments included the following:
The value of the tax relief and stop changing the rules to build trust would help
individuals to save more
Flat rate tax relief of 30% and no Annual Allowance
A new national system (via NEST) to facilitate collective drawdown in competition
with existing providers.
A dashboard or virtual aggregator allowing people to see all their pensions in one
place. Making transfers easier to allow them to consolidate if they wish - with or
without advice. Along with HMRC making sure transfers are safe by authorised
schemes and proper regulation of the trust-based market. Digital tech so people
can use 'what if' tools. More positive messages from the govt supporting longterm saving along with more joined up govt policies.
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Consultation question 4
Would an alternative system allow individuals to plan better for how they use their
savings in retirement?
Survey question 6
Would an alternative system allow individuals to plan better for how they use their
savings in retirement?
Age < 36
Yes
8%
Age 36 50
23%
No
92%
77%
Age > 50
69%
31%
Comments included the following:
Moving to TEE would put greater uncertainty on future plans as individuals might
be sceptical that the rules will change again when they get to access their
savings. Any "sweetener" up front would have to be significant to give individuals
an incentive to lock their savings away into a pension
If an alternative system resulted (as any change to the broad EET principle would
invariably do) in the separation of pre- and post-implementation pension savings,
this would cause greater confusion and lack of clarity for retirement planning
purposes.
I think an easement to allow individuals access to a proportion of their pension
from age 40 would encourage more saving. Age 55+ is too far away into the
future and many younger people don't see the benefit in saving for that far ahead.
If they could access up to, say 25% of their pot from age 40, then they would be
more encouraged to save and they would still keep the other 75% for retirement.
I don't see how changes to tax will impact this. The introduction of DC flexibility
has just compounded the issue of confusion - changes to that so that it is easy
to operate and understand rather than the current half baked, ill thought out
system based on sound bites and posturing would be better than embarking on
another round of ill thought out and half-baked reforms. Do one thing properly
before setting off on another thing.
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Survey question 7
In the specific context of DC arrangements, which of the following would allow
individuals to plan how they use their savings
A TEE tax regime which would ensure that benefits would be in
the form of a tax-free lump sum or sums
18%
The current Freedom in Pensions regime is perfectly adequate
52%
The introduction of Collective Defined Contribution (CDC)
schemes
19%
Effective use of default decumulation strategies (such as that
recently proposed by NEST)
34%
The re-introduction of a Minimum Income Requirement to ensure
that members cannot exhaust retirement savings during their
lifetime
37%
Other
14%
Comments included the following:
The re-introduction of a MIR is the perfect and easy to administer solution to
balance flexibility with responsibility
Too few understand state and private provision and how the two fit together. New
freedoms have taken emphasis off provision throughout retirement allowing
press and industry to highlight opportunities to cash in and spend. Complete
opposite of pension savings providing trough long term retirement.
Further evolution of the Pension Freedoms - this isn't perfectly adequate as it
was rushed and poorly thought through. We need more consumer research,
understand how people are reacting to the freedoms and the barriers. There
needs to be a balance between access and barriers explaining the risk of actions.
It can work but will take time. CDC and default strategies aren't the answer - in
fact they are backward steps as neither will enable people to take personal
responsibility or will match individual needs.
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Consultation Question 5
Should the government consider differential treatment for defined benefit and
defined contribution pensions? If so, how should each be treated?
Survey Question 8
Should the government consider differential treatment for defined benefit and
defined contribution pensions?
Age < 36
Yes
36%
Age 36 50
33%
No
64%
67%
Age > 50
58%
42%
Comments included the following:
(Aged under 36)
DB Benefits need to be retained as they are. They provide a good income for
many in retirement
This would be unfair and damaging - not all employees have access to DB. Any
changes to DB would most likely finish DB completely in the private sector
The current rules protect public sector workers and older private sector ones at
the expense of younger private sector ones. DB schemes are massively
undervalued. With a £100k pot, you can buy an index-linked annuity of £3k/£3.5k
or so. On this basis, DB pots for the LTA should be valued at 30 times the annual
income, rebased every 3 years or so based on annuity rates.
(Aged 36 to 50)
Not differential treatment, the rules on valuing benefits for AA and LTA need to
be reviewed to ensure fairness. The Government should consider removing life
assurance benefits out of the LTA.
As is demonstrated by the extreme complexity of administering DB pension
accrual post-A Day 'simplification', it is not easy to determine the level of tax relief
that individuals benefit from due to their employer funding the majority of their
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30 September 2015
pension accrual. It is much easier to identify the level of tax relief obtained (and
therefore to amend the basis of that relief, if necessary) under a pure DC
arrangement. The current basis of relief for DB arrangements is generous (and
is arguably balanced in favour of higher rate tax payers - albeit that that is only
the case because they pay a higher rate of tax in the first place!) but that
generosity is arguably justifiable given the additional risks taken on by the limited
number of employers who continue to offer DB pension accrual.
This is a red line. DB already gets preferential treatment (e.g. LTA - people can
get almost twice the income under DB compared to DC). Face it DB is at the end
of the road and costs tax payers far too much. Most of pension tax relief goes to
DB schemes to fund deficits. One solution could be for the Pensions Regulator
to change its funding assumptions to allow deficits to be paid back over a longer
time. Tax relief should be invested in DC schemes for future savers - not for the
lucky ones with DB.
The Government should ensure that the tax regime is equitable between DC and
DB pensions by either increasing the DC Lifetime and Annual Allowances or
increasing the multiplier used by DB plans to calculate the Pension Input Amount.
It should also ensure that MPs’ pensions are subject to the same tax rules as the
rest of the population.
(Aged over 50)
I can't see how TEE can work in DB schemes largely funded by employers, and
it would cause members to have current tax liabilities on future benefits which
may never be paid, for example in the event of death before retirement
Yes - but it must be scrupulously fair between the two - particularly as DB is now
very largely the province of the public sector only. That differential treatment need
not be seen purely in terms of EET -v- TEE; it could apply within the existing
framework. LTA-only for DB and AA-only for DC might make sense, for example.
The current wildly unequal playing field for the two systems makes it unclear what
the policy intention is in terms of a tax system-sanctioned level of income.
Simplest to remove LTA altogether so the penalising of DC for investment growth
vs DB assessment is removed.
- 23 EX10R/15
30 September 2015
Survey question 9
How should each be treated?
I prefer to stay with EET for both. If we must have TEE for DC pensions, keep the
present system for DB. This is difficult though, due to schemes near the border, e.g.
cash balance with guaranteed interest rates, money purchase with guaranteed
annuity rates, underpins.
DC - EET (with flat rate relief, if necessary). DB - No change to current system.
A system akin to the IR12 regime for DB arrangements and a system similar to the
current regime for DC. One size does NOT fit all.
DB should be ring-fenced and existing membership / accrual being permitted with a
£40k AA for everyone (regardless of adjusted income). The Annual Allowance for
DC members should be £30k for everyone, (regardless of adjusted income).
DC could be TEE but there would need to be a reduction to existing DC pots to make
up for tax relief already accrued, if they too are to be E at retirement. Under TEE
'annuity products' would then be paid tax free, leading to further innovation DB
should remain as EET, with pension paid taxed under PAYE
Lifetime allowance limits need to be removed for DC pensions due to the relative
inability to achieve maximum retirement incomes from products such as annuities in
the current financial climate. DB caps still to apply to reduce potential tax relief
abuses
- 24 EX10R/15
30 September 2015
Survey question 10
Were a separate tax regime for defined benefit schemes to be introduced, which
would be your preferred model? (Please allocate a score to each, with 1 for ‘most
preferred’)
1
2
3
4
A model similar to the pre A Day regime
based on absolute limits for emerging
benefits with no constraints placed on
the rate of benefit accrual
26%
32%
35%
8%
A model similar to the pre A Day regime
based on absolute limits for emerging
benefits with some constraints placed
on the rate of benefit accrual
17%
48%
27%
6%
The existing system of allowances,
retaining the current use of conversion
factors for capitalising both overall
accrued benefits and benefits accrued
over the past year
48%
13%
34%
6%
A TEE system in which accruing DB
benefits are taxed as a benefit in kind
but are entirely tax exempt in payment
9%
7%
4%
80%
Comments included the following:
TEE would be a disaster for DB
Would members like the notion of paying tax up front and then possibly not
getting the benefits (e.g. tax changes, schemes going into PPF). For PPF, would
the government refund all the surplus tax paid if the member did not receive all
the benefits?
The ideal system of limitations would place an overall limit on tax efficient accrual,
but not place any limits at all on how fast that benefit is accrued (in terms of both
DC and DB pensions). "You can save up to a set limit over your lifetime - we
don't mind how you do it or when, but once you hit that limit you will not receive
any further tax relief."
- 25 EX10R/15
30 September 2015
Survey question 11
If a separate tax regime for defined benefit pensions were to be introduced,
which would be your preferred model for the tax treatment of contributions?
(Please allocate a score to each, with 1 for ‘most preferred’)
1
2
3
4
Full exemption for both member and
employer contributions, on the
principle that there is no direct
correlation between the monetary
value of contributions and the value of
the accruing benefit
47%
22%
24%
7%
Full
exemption
for
employer
contributions and the existing system
of tapered rates of relief for higher
earners
18%
45%
33%
4%
Full
exemption
for
employer
contributions and basic rate relief for
all members
26%
32%
39%
3%
A TEE system in which the employer
contribution is taxed as a benefit in
kind and member contributions are
made from net earnings
9%
1%
4%
86%
Comments included the following:
Full exemption for both member and employer contributions, on the principle that
there is no direct correlation between the monetary value of contributions and
the value of the accruing benefit
Full exemption for employer contributions and the existing system of tapered
rates of relief for higher earners
Full exemption for employer contributions and basic rate relief for all members
A TEE system in which the employer contribution is taxed as a benefit in kind
and member contributions are made from net earnings
- 26 EX10R/15
30 September 2015
Survey question 12
Were a separate tax regime for defined contribution schemes to be introduced,
which would be your preferred model? (Please allocate a score to each, with 1 for
‘most preferred’)
1
2
3
4
The existing system of allowances,
retaining both the Annual and Lifetime
Allowances. 25% of emerging benefits
are tax free; the remainder taxed at the
member’s marginal rate.
16%
29%
41%
13%
A modified version of the current system
which retains just the Lifetime
Allowance. 25% of emerging benefits
are tax free; the remainder taxed at the
member’s marginal rate.
28%
37%
33%
3%
A modified version of the current system
which retains just the Annual
Allowance. 25% of emerging benefits
are tax free; the remainder taxed at the
member’s marginal rate.
48%
30%
22%
0%
A TEE system in which all emerging
benefits are tax free
8%
4%
4%
84%
Comments included the following:
But removing the tapered AA and finding another way to restrict relief for higher
earners
Moving to TEE will create two tier regulations for existing and future savings. This
will be costly and complex. It may open the door for the treasury to apply an
'equalization tax grab' on current pension funds to move to the TEE model. That
would kill most DB schemes and be too penal to dc savers
What about a flat rate of tax relief?
- 27 EX10R/15
30 September 2015
We do not need both an annual and lifetime allowance, and having only an LTA
is a much better way of giving people flexibility to save while limiting overall tax
relief.
If a TEE system was introduced I wouldn't save in a pension unless I have to at
the required automatic enrolment minimum. Any surplus would go to an ISA or
other non-pension investment.
- 28 EX10R/15
30 September 2015
Survey question 13
If a separate tax regime for defined contribution pensions were to be introduced,
which would be your preferred model for the tax treatment of contributions? (Please
allocate a score to each, with 1 for ‘most preferred’)
1
2
3
4
5
Full exemption for both member
and employer contributions
56%
10%
12%
20%
2%
Full exemption for employer
contributions and a flat rate of relief
for member contributions
21%
31%
30%
15%
3%
Full exemption for employer
contributions and a tapered rate of
relief for member contributions
11%
30%
33%
25%
1%
Full exemption for employer
contributions and basic rate relief
for members
9%
26%
23%
39%
3%
A TEE system in which the
employer contribution is taxed as a
benefit in kind and member
contributions are made from net
earnings
3%
3%
2%
1%
91%
Comments included the following:
Using flat rates runs the risk of disincentivising HRT payers. Anything below 30%
makes it unattractive for HRT payers to save. Realistically though, increasing tax
relief for BRT payers seems to be ineffective since it cannot be expected to drive
additional saving and would simply be a government subsidy of saving. It would
also fail to deliver any significant economic benefit which is a clear requirement
of the review.
- 29 EX10R/15
30 September 2015
Any type of tapered relief just adds complexity. We have an opportunity to design
something simple to which people will want to save into as it makes financial
sense to do so.
You can't treat employer contributions differently from member contributions must be fair between members of different schemes/salary sacrifice/noncontributory etc.
- 30 EX10R/15
30 September 2015
Survey question 14
If a separate tax regime for defined contribution pensions were to be introduced,
which would be your preferred model for the collection of contributions? (Please
allocate a score to each, with 1 for ‘most preferred’)
1
2
3
4
Use just the Net Pay system (as with
occupational schemes)
34%
34%
31%
1%
Use just the Relief at Source system (as
with contract-based schemes)
14%
35%
45%
5%
Retain the current system of both Net
Pay and Relief art Source
50%
26%
20%
5%
A TEE system in which the employer
contribution is taxed as a benefit in kind
and member contributions are made
from
net
earnings.
Matching
contributions are made by Government
in respect of member contributions
2%
5%
4%
89%
Comments included the following:
Having just one system would make life easier for members to understand, but
switching to Net Pay would stop members paying lump sums direct and claiming
tax relief.
Need to cater for self-employed
RAS-only makes sense under a flat-rate relief model; no otherwise
Immediate tax relief on take home pay is necessary, without which people don't
see the benefit of their contribution.
- 31 EX10R/15
30 September 2015
Consultation question 6
What administrative barriers exist to reforming the system of pensions tax,
particularly in the context of automatic enrolment? How could these best be
overcome?
Survey question 15
What administrative barriers exist to reforming the system of pensions tax,
particularly in the context of automatic enrolment?
Time constraints within the joining window for AE
39%
Difficulties in estimating earnings for high earners
46%
Member resistance to having employer contributions / accruing
benefits taxed as a benefit in kind
78%
Harmonising tax treatment for any new regime with benefits
accrued / contributions made under the existing system
81%
Other
20%
Comments included the following:
Harmonising the current regime with any new regime is a massive barrier in every
context!
Difficulties in taxing DB accrual (including the added complexity of deficit
reduction contributions); Potential additional cross-border issues for
multinationals if a different tax relief basis to the majority of the rest of the EU is
adopted; Administration and payroll systems changes and the related costs;
timing for the introduction of any change
Changing the tax rules as auto-enrolment is rolled out to the majority of
employers will create additional confusion over the benefit of saving for
retirement.
- 32 EX10R/15
30 September 2015
Changing the tax rules as auto-enrolment is rolled out to the majority of
employers will create additional confusion over the benefit of saving for
retirement.
Trusting that future governments won't change the system again in the future
- 33 EX10R/15
30 September 2015
Survey question 16
In the context of combining a new tax regime with existing arrangements, can these
obstacles be adequately overcome?
Yes
37%
No
63%
Comments included the following:
With current changes and overload of a pensions industry, there is no scope to
implement such a changes. Too many overriding and crucial changes have been
introduced - administrators do not cope with it.
Probably from a technical aspect, but the price would be too high in terms of
complexity for individuals and providers / administrators who have already seen
unprecedented change requiring huge investments - ultimately at the cost of
sponsoring employers and members
It will be a self-defeating mess, very short term boost for the Treasury, long term
even less retirement provision
It would be a legal, administrative and financial nightmare - it would make
pension simplification in 2006 look like a walk in the park!
Probably but at major cost to employers who are simply trying to provide decent
retirement saving vehicles. Probably lead to further erosion of benefits as
companies are forced to spend on systems and advice money which otherwise
could be spent on employees' benefits
- 34 EX10R/15
30 September 2015
Survey question 17
Could a new TEE regime for pensions only work if applied to arrangements
commencing at a set future date, with existing conditions continuing to apply to
existing schemes?
Yes
59%
No
41%
It would be impossible to change the rules on existing contributions / benefits
It could work but it would be unfair
I can see no way round this but, I am happy to be proved wrong. People working
in Govt usually have no practical experience of how their proposals will work in
the real world
Adding another tax regime on top of the existing one is ridiculously complicated
and extremely expensive to administer. The government is stating that members
do not understand tax relief at the moment. How would people understand two
systems of tax relief within the same product?
This would create a 3rd tier of members. DB schemes already provide more
generous benefits than DC schemes, this would mean younger workers would
have even less incentive to save for retirement and would give them even less
benefits than those before them with DC pension arrangements. This would also
create a disincentive to move employment which would be disastrous for the
economy.
TEE is not a sensible idea if the concept of a pension scheme is to remain.
- 35 EX10R/15
30 September 2015
Consultation question 7
How should employer pension contributions be treated under any reform of pensions
tax relief?
Survey question 18
How should employer pension contributions be treated under any reform of pensions
tax relief? (Please allocate a score to each, with 1 for ‘most preferred’)
1
2
3
4
The existing EET system should be
retained
89%
6%
2%
2%
TEE but with full tax exemption for
employer contributions
5%
71%
17%
8%
TEE with employer contributions taxed
as a benefit in kind
3%
3%
32%
61%
TEE with employer contributions made
as a matching contribution to member
contributions
3%
20%
49%
29%
- 36 EX10R/15
30 September 2015
Consultation question 8
How can the government make sure that any reform of pensions tax relief is
sustainable for the future?
Survey question 19
How can the government make sure that any reform of pensions tax relief is
sustainable for the future?
Ensure that there is effective consensus between the political
parties and pensions industry in order to ensure stability
85%
Work with the pensions industry to ensure that there are
appropriate financial products to provide simple retirement
solutions
77%
Promote increasing levels of savings
62%
Other
22%
Comments included the following:
Establish an independent Pension Commission to keep the whole area under
review and for this body to be able to make recommendations to future
governments.
Stop the constant stream of fundamental changes that give individuals no
comfort whatsoever that whichever system is in place today will remain in place
tomorrow - pensions are lifetime savings so any given system should be
designed to last for an individual's lifetime; not to suit the short-term fiscal whims
of a Government.
Give any new system time to work - the 2006 change was supposed to cure all
ills and has never been left alone long enough to prove one way or the other.
Constant meddling will not solve anything. Pension provision is long term and
should be treated by politicians as such. Their constant change results in
employers losing patience and resorting to simplest and cheapest provision.
- 37 EX10R/15
30 September 2015
Consider very carefully and responsibly before making fundamental changes for
the short term gain of the Treasury. Also make at least an attempt to consider
inter-generational fairness. Yet again the younger generation could get a poorer
deal than previous generations. Where on earth will this stop? If money has to
be saved perhaps the Government could consider reforming the triple lock on
state pension increases? Or would this not work politically?
Limit tax relievable annual contributions to a level which is adequate for 99% of
the population (i.e. £40,000 per annum) and perhaps reduce carry forward from
3 years to 2 years. This would limit the amount of tax relief being claimed by the
highest earners but still give everyone the chance of accumulating a decent sized
pension pot. Once decided, commit to maintaining the system for a definitive
period of at least 10 years so as to give people the confidence to plan ahead
knowing what the rules will be.
Pensions tax relief is not a sustainable policy for the future. Until government
acknowledges its responsibility to provide for its citizens in retirement any
incentive to save will be temporary in nature. Trying to influence savings by
periodically adding and removing subsidy is never likely to be successful in a
recessionary environment. Better to subsidise at lower affordable levels than not
at all.
Flat rate, keep it simple, stop meddling.
Stop making political points in order to gain votes. Pension saving is too
important to be used as a political football; make sure the person proposing the
changes actually understands the implications and the consequences of the
changes. Stop trying to build on what is there already - if we want change, let's
start with a blank sheet of paper and come up with what we want and design it.
Then take proper time and care to consider the options for how that should
interact with the existing (ridiculously complicated) rules. Don't just add things on
and on with no real consideration of the implications.
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