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Flat-rate pension tax relief: calls for 30% rate fall on deaf ears

In a report published today think tank the RSA, whose head Matthew Taylor led a government report into the gig economy last year, put forward the case for a flat-rate of pension tax relief to help the self-employed.

Flat-rate calls

Calls for flat-rate pension tax relief will never die it seems. The government may be embroiled in the details of Brexit, but people still want to discuss pension taxes! 

In a report published today think tank the RSA, whose head Matthew Taylor led a government report into the gig economy last year, put forward the case for a flat-rate of pension tax relief to help the self-employed. 

'We propose replacing the current multi-tiered tax relief system with a flat-rate model of 30%. This means that everyone – regardless of how much they earn – would only need to deposit 70p for every £1 they wish to add to a pension. We estimate this reform would leave 75% of pension savers better off – including the low income self-employed,' it said. 

But what do people think of this idea (and the others put forward in the report, which you can read here)? Read on to find out...

Flat-rate calls

Calls for flat-rate pension tax relief will never die it seems. The government may be embroiled in the details of Brexit, but people still want to discuss pension taxes! 

In a report published today think tank the RSA, whose head Matthew Taylor led a government report into the gig economy last year, put forward the case for a flat-rate of pension tax relief to help the self-employed. 

'We propose replacing the current multi-tiered tax relief system with a flat-rate model of 30%. This means that everyone – regardless of how much they earn – would only need to deposit 70p for every £1 they wish to add to a pension. We estimate this reform would leave 75% of pension savers better off – including the low income self-employed,' it said. 

But what do people think of this idea (and the others put forward in the report, which you can read here)? Read on to find out...

Tom McPhail, head of policy, Hargreaves Lansdown

'The government has unfinished business with pension tax reform. The idea of moving to a flat rate is well-tested and would garner support in many quarters. However pension taxation is notoriously complicated and any move to reform the central pillar of the system would necessitate a more comprehensive review of the multitude of quirks and wrinkles which bedevil pension planning. I’m not sure the government has the appetite for that right now.

 'The inertia which has made auto-enrolment such a success also causes significant engagement challenges. Once someone has a pension they should be allowed to keep it from job to job, with the right to ask a new employer to pay money into an existing arrangement.

'Most self-employed people start their working lives in employment so we have a crazy situation where they are being enrolled and then the pension system lets them go. By putting individuals in control of their own pension we would incentivise pension providers to look after them and keep them engaged when they go self-employed.'

Tom Selby, senior analyst, AJ Bell

'Introducing a flat-rate of pension tax relief sounds great in theory but there would be huge practical challenges to overcome, most notably in relation to defined benefit schemes. Without an answer to the question of how a flat-rate would be applied to defined benefit savers any recommendation is simply hot air.

'Even if a flat-rate of tax relief could be made to work, the government would need to be absolutely confident such a reform would actually encourage more people to save and there is little evidence so far. Undersaving for retirement remains arguably the biggest challenge facing society today, so any major reform to the system must only be entered into if there is a significant degree of confidence that it will result in more people putting money away for their future.

'Pragmatically, I doubt a government with a razor-thin parliamentary majority and facing the colossal challenge posed by Brexit will have much appetite for something as controversial as this.'

Steven Cameron, pensions director, Aegon

'An overhaul of pension tax relief is a perennial issue, with debate revolving around fairness between different earnings levels, costs to the government and the complexity of making changes.

'A flat rate of relief at say 30% on personal pension contributions would address concerns that higher earners are getting a greater incentive than those paying basic or no income tax. A move to a flat rate of tax relief of 30% for everyone would benefit those paying basic or no income tax but would reduce the incentives for higher earners to save for their retirement though pensions.

'One challenge is raising awareness of how tax relief works and a flat rate of 33% scores highest here, as the government is adding £1 for every £2 from the individual. However, the rate is likely to be set based on not costing the government extra money. Anything below 30% risks making pensions unattractive to higher and additional rate taxpayers.

'The complexity of introducing a flat rate across all forms of pension is its biggest downside and shouldn’t be underestimated. One particular challenge is making it workable for defined benefit schemes. While few individuals in the private sector continue to build up benefits in these schemes, the government would need to consider if it is prepared to risk further unsettling them. A move to flat rate relief could be the final nail in the defined benefit coffin.

'With Brexit currently absorbing pretty much all of the government’s thinking time, it would be highly surprising if this were progressed while still in the Brexit transition period.'

No go for flat-rate?

It seems that the RSA will have to wait, then, for its flat-rate pension tax dreams to become a reality. 

In truth the last time flat-rate pension tax relief was really a possibility was when George Osborne was chancellor and preparing for his 2016 Budget. He was forced to stop the plans weeks before the big day, apparently to win over Tory backbenchers to the Remain cause in the EU referendum (that went well).

However this will not stop people calling for change. Who knows, perhaps we can use the £350 million we give to the EU every week and give it to people saving into a pension?

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