PLSA urges caution on potential tax relief changes

No alternative tax relief system is perfect, the trade body says, as it calls for the government to focus on fairness, simplicity and sustainability in any changes.

Chancellor Rachel Reeves is scheduled to deliver her first Budget speech on 30 October, and speculation is mounting that she could make changes to tax relief on pension contributions.

Last month, the Fabian Society – a left-leaning thinktank – put forward a radical proposal to overhaul tax relief to address perceived inequalities, as higher earners often benefit more from the current system than lower earners.

It proposed a single flat rate of tax relief and a cap on the maximum value of tax-free lump sums at £100,000. The society also called for pensions to be included in inheritance tax calculations.

However, the PLSA has written to the chancellor calling for her to consider five key areas that the trade body first put forward in 2021 as essential to fair pension taxation.

In the letter, Nigel Peaple, director of policy and advocacy at the PLSA, acknowledged the difficult financial situation that Reeves had to contend with, but warned that tax relief was an “important incentive” for people to save and should not be undermined.

The PLSA called for the government to prioritise adequacy, good decision-making, fairness, simplicity and sustainability in any changes to the tax relief system.

factbox

Tax relief: Rumours abound as chancellor pressed on plans

Rumours of changes to pensions tax relief were fuelled last week after an exchange in parliament between Peter Bedford, MP for Mid Leicestershire, and chancellor Rachel Reeves.

Analysing potential changes

A separate report from the PLSA, also published in 2021, analysed how different approaches to taxation could affect different groups of savers – and concluded that “no single reform of the current system is perfect”.

Peaple stated in this week’s letter: “Even the introduction of a new, more generous, single rate of 25% would only result in a modest uplift in pension income for those savers who will benefit from it...

“Most reform options leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes.”

Lessons from the lifetime allowance

The PLSA also highlighted difficulties with abolishing the lifetime allowance, which was announced by the previous chancellor, Jeremy Hunt, last year.

The trade body said the regulations implementing the abolition were “flawed and have needed multiple amendments”.

It called for the government and HM Revenue & Customs to “rectify these errors in full” to support schemes making administrative changes.

“Pensions tax relief is a highly complex area and changes, particularly when rushed, create unintended consequences for schemes and schemes members,” Peaple said.

Other areas of concern

As well as tax relief, the PLSA focused on productive finance investment, auto-enrolment and the state pension in its Budget submission.

The trade body reiterated its call for policy changes to enable schemes to access new asset classes such as infrastructure and venture capital. It also called for pension schemes to be exempted from dividend taxes on UK investment, and for trustees to be given greater powers over the use of funding surpluses.

The PLSA also repeated its call for the government to expand the scope of auto-enrolment to include younger and lower-paid earners. It also argued for the introduction of a “roadmap” to raise the default minimum contribution and improve access to retirement savings for the self-employed.

The triple lock on the state pension should be maintained, the PLSA said, and there should be no further changes to the state retirement age.