• JLT Employee Benefits ("JLT EB") calls for flat rate pension tax relief in response to consultation
• Government should contribute £1 for every £2 saved
• Flat rate system fairer for lower and middle income earners, according to JLT EB's research
Almost half of employees (46%) would prefer a single rate pension tax relief over the current system, according to research by JLT Employee Benefits ("JLT EB"). This finding comes from a white paper, entitled "Making the right changes for the right reasons" which comprises a survey of 1,000 employees and assesses the current level of retirement saving incentive versus alternative pension tax relief systems. Of the other employees who said a pension tax relief system would encourage them to save more for their pension, 32% would favour the current pension tax system and 22% an ISA-style system.
The report, which forms part of JLT EB's response to the Government's consultation on pension tax relief (closing today), found that the current pension tax relief system does not sufficiently incentivise low to middle income earners, who need the most encouragement to save for their retirement. JLT EB believes this is in part due to a lack of understanding of what pension tax relief actually is.
According to JLT EB, the current system is in need of reform, in order to avoid an increase in the number of older people relying heavily on means-tested benefits. In light of the declining ratio of workers to pensioners, the burden for future tax payers who will have to fund this substantial public expenditure is unsustainable.
JLT EB has modelled the incentive to save under different pension tax relief systems and found that under the current tiered tax relief system, where savers are taxed upon the point of withdrawal, there is a financial incentive to save for everyone with earnings between £20,000 and £80,000. However, JLT EB's research suggests that a single tier model would provide a more even spread of incentives across earnings ranges. Meanwhile, the mooted system similar to ISAs, where savings are taxed on the way in rather than on the way out, does not provide an incentive for anyone at any earnings level.
To encourage lower and middle income earners to save more, JLT EB proposes replacing the current pension tax relief system with a single rate of tax relief, set above the level of the basic rate of income tax, and expressed as a Government matching contribution. Ideally, the single rate of tax relief should be a minimum of 33%. The communication of this is key. JLT EB suggests that the Treasury phrases the relief as "the Government will match £1 for every £2 saved", as it would be easier to understand and could therefore result in greater engagement with pension saving.
JLT EB's survey of employees suggests that, on its own, any change in tax relief will have a limited impact on the level of pension savings. Hence, it must be propped up with greater levels of education, transparency and trust in the pension industry. As a result, JLT EB recommends the implementation of the single rate relief should be accompanied by a high profile education campaign, noting that corporates could offer valuable support by providing financial education in the workplace.
ISA-style taxation will worsen pensioners' financial situation and weaken trust in the pension system
JLT EB does not recommend the ISA-style system, where pension contributions are paid from taxed income but savings are subsequently accessible tax free, because, as its model shows, it offers an inferior level of incentive. Further, it could lead individuals to fear that, having been taxed on the way in, future governments could later decide to tax money on the way out as well.
This underlines how trust in the pensions system is paramount in encouraging individuals to save. For this reason, JLT EB is opposed to the use of pensions for short term political gains as they will increase mistrust in the system. It proposes that reforms should be enacted based on sound, lasting principles; not motivated by the prospect of a short term rise in public revenue.
Duncan Howorth, CEO, JLT Employee Benefits, comments:
"Our research shows that a single rate pension tax relief is the favourite option amongst employees, perhaps not surprisingly as we found it would also be a fairer system than the current one. If communicated properly, it will provide a greater incentive to save for those who need the most encouragement. Bigger pension pots should result in greater engagement, with individuals being more motivated to plan better and take advice in regards to their retirement options.
"The Government has made a significant effort to provide individuals with a retirement base in the form of the State pension, nudging people further in the right direction through auto-enrolment. In the same way, the single rate will contribute to a robust and sustainable system by incentivising everyone.
"We know that the current UK pensions tax relief system is not properly understood by most people and is a barrier for saving. Communicating the changes simply and widely will be critical in increasing the number of people able to enjoy retirement in dignity and comfort, reducing the burden that would otherwise fall on the shoulders of future tax payers."