On the go: The Association of British Insurers has urged the government to simplify the pension tax relief system, arguing it worsens existing inequalities in its current form.
ABI-commissioned research, published on Tuesday, found the current system benefited higher earners in particular and was less favourable towards women, the lower paid and younger workers.
When paying into a pension, savers receive tax relief on any contributions they make, and under the current system tax relief is paid at the highest rate of income tax the saver pays.
According to the research, carried out by the Pensions Policy Institute, basic rate taxpayers paying 20 per cent in income tax make up 83.4 per cent of total taxpayers but only receive 26 per cent of the pension tax relief related to defined contribution pensions.
It also found the number of people earning less than £30,000, who qualify for tax relief, increased to 62 per cent from 52 per cent due to automatic enrolment. However, only 24 per cent of tax relief goes to this cohort.
As well as being entitled to a higher rate of relief, higher earners are likely to have more cash available to put into their pensions than lower earners, further highlighting the skew towards this group of savers, the research stated.
Furthermore, the system is biased when it comes to age, as almost half (42 per cent) of people who contribute to a DC pension are under the age of 40, but they only receive 27 per cent of the available tax relief.
People in their forties and fifties receive two and a half times as much tax relief from the government.
Meanwhile, 71 per cent of DC pension tax relief goes to men, as they pay 69 per cent of the contributions, further highlighting the ongoing gender pensions gap.
The PPI and ABI suggested that making a small change to the system could help solve these inequalities.
Changing the current system to a single flat rate of relief would increase the amount of pension tax relief for basic rate taxpayers, from 26 per cent to a more equal 42 per cent, the organisations said.
Yvonne Braun, director of long-term savings and protection at the ABI, said: “Pension tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pension tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”
But Andrew Tully, technical director at Canada Life, warned any changes to the system must be well thought out and should also cover defined benefit pension savers.
“We must learn the lessons of the past and not make any knee-jerk changes,” Mr Tully said.
“There are a number of difficulties in implementing changes as we have different systems of giving tax relief.”
This article originally appeared on ftadviser.com
