Flat Rate Pension Tax Relief On Way

Flat Rate Pension Tax Relief On Way.

Finally, financial commentators are waking up to the predictions that we made 9 months ago.

Before the General Election in May 2015, we predicted that under a Conservative government there would be a move to a single rate of pension tax relief with tax relief for higher rate taxpayers and additional rate taxpayers being reduced to one single basic rate relief tier for all. In a report this week the Financial Times has suggested the same.

The FT has suggested that a single rate of tax relief could be set at between 25% and 33% for private contributions to a pension scheme.

Early last year one of our directors, Ashley Clark, attended a pensions forum where the then pensions minister, Steve Webb, was speaking. During that forum there was an open question time where Mr Webb raised the possibility of a single tier tax relief at around 30% and Ashley raised the question of how the government would prevent abuse given that if we are making pension contributions and receiving 30% tax relief, for the over 55's they could pay into a pension today and then retire on their pensions the very next day and withdraw 25% as a tax-free lump sum and the balance in taxable income only being taxed at 20%. Ashley suggested that this did not make financial sense and the government would lose money.

That said, the government have confirmed that they will be revisiting the whole basis of taxation and relief in the March 2016 Budget and no doubt there will be significant changes both to tax relief.

Comment

We suggest that there could even be a move to simplify this further with a lower rate of tax relief at say 10% or 20% for all yet we are then allowed to withdraw all of our pension rights with a flat 20% tax payable or indeed no tax at all. This approach is very common around the world, particularly in the United States and Australia, and it would indeed simplify not just the tax relief principles but also HMRC's collection of revenue for pensions in payment.

It makes absolutely no sense for a saver to retire, to use flexible drawdown and withdraw 25% as a tax-free lump sum with the balance of any lump sums or income taxed on an emergency code and then HMRC having to issue refunds of tax a few months later.

Simplification is key. We believe that the likely outcome will be a flat rate of pension tax relief with a maximum annual contribution but then you can contribute even more to your pension fund without tax relief but also without tax penalty when you withdraw pension income in retirement.

We can see the whole system harmonising with the ISA system much in the same way as the US has done for 401(k)'s, IRAs and Roth IRAs (the US equivalents to personal pensions and ISAs).