Friends Life calls for fairer pension tax relief

Friends Life has welcomed the debate around pension tax relief, sparked by recent comments made by Pensions Minister Steve Webb.

Related topics:  Retirement
Rozi Jones
17th February 2015
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The life and pensions company has been working on similar proposals for some time and is now calling for cross party commitment to the reform of incentives for pension saving. The reform would make it fairer for consumers and help reduce the retirement gap.

Friends Life are proposing a flat rate of pension tax relief for all set at 33% - effectively giving consumers ‘buy two, get one free’ on their pension contributions.

It is also calling for minimum automatic enrolment contributions for employees would be increased to reach 6% in 2019, locking the enhanced contribution from government into pension savings, at no additional cost to employees.

Additionally, the reforms would ensure that employer contributions should continue to be free from National Insurance and income tax,  to retain incentives for  employers to support pension saving by their employees, the annual allowance should be the lever to control future expenditure on pension tax relief, and measures should be introduced to prevent higher and additional rate taxpayers benefiting unfairly from salary sacrifice.

Friends Life believes that making these changes would introduce fairness to the system of incentives for pension saving and increase the amount being invested for retirement for the majority. They would also retain the incentive for employers to support pension saving.

Andy Briggs, Group Chief Executive at Friends Life, said:

“An aging population is one of the biggest challenges this country is facing. As our recently-launched Retirement Savings map showed, people are facing significant shortfalls in their retirement income but we can go some way to reducing this retirement gap if we introduce further structural reforms. Currently, higher and additional rate tax payers make half of the pension contributions but benefit from 75% of the tax relief2. That has to change, to increase the pension savings of those that need it most.

“The principle behind the current system of pension tax relief is that tax is paid in retirement at the same rate as the tax relief given on contributions. But that is a myth, as only a small proportion of people continue to pay higher rate tax once they retire3. Our proposal recognises that tax relief is simply the government’s contribution to people’s pension savings and says it should be given on equal terms to all.

“A flat rate of 33% would be effective and easily understood by consumers as they would ’buy two get one free’ on their pension contributions. A flat rate lower than this would be a backwards step, as many basic rate taxpayers already get 32% relief today by contributing via salary sacrifice.

“Our proposal introduces greater fairness, and maintains incentives for employers to contribute, which is essential in helping people save for a better retirement. Our proposal can deliver Treasury savings to help reduce the public deficit while introducing the fairness we call for and while encouraging increased levels of pension saving.

“Implementing such a significant change will take time and should only be done with long-term cross-party commitment and after the successful implementation of the existing Automatic Enrolment reforms. These aren’t changes that can be rushed, but reform of pension tax relief will bring real benefit and has to happen."

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