Members of the UK200Group of independent chartered accountancy and lawyer firms have responded to reports that the government may move to scrap remaining special tax reliefs on pension contributions for higher earners.

 

Pensions Minister Ross Altmann told the Financial Times that a flat rate of tax relief was "one of the things we will consider" in a review. The publication also quoted actuarial consultants Lane Clark & Peacock as saying that reductions in tax relief coming in next April signalled "the end of the road" for defined benefit and defined contribution executive pensions.

 

Andrew Jackson, head of tax at UK200Group firm Fiander Tovell LLP

The essential point about pensions is that they defer income until a later year for tax purposes – you don’t get taxed on the money you put into it until you take it out.  This allows you to spread the income from your working years across your whole life.

 

Incidentally, the 25 per cent tax-free lump sum is something of an anomaly that distorts this model. It’s a hangover from defined benefit schemes, and in my opinion the system would be better without it (or perhaps capping it at a modest amount).

 

To reduce the tax relief on contributions means that income is taxed before you put it into a pension, and again when you take it out. That’s taxing prudent savers twice, which breaks the whole structure of a pension. If you’re going to put post-tax money into any form of savings vehicle, an ISA would seem far more sensible than a pension as the capital amount doesn’t get taxed when you withdraw it.

 

A flat rate of relief might make sense if it were above the level of basic rate tax, to encourage basic rate earners to contribute to pensions. If combined with the tax-free lump sum, it might then leave higher rate earners slightly better off, or at least no worse off – some complex modelling might be required to decide.

 

But the fundamental point about pensions is that they are investments for potentially 50 years or more. To be fair to savers, the regime should stay broadly unchanged over that time. That means it should stay simple, and should not be tinkered with for short-term political or fiscal purposes. 

 

The simplest pension model is to treat income contributed to a pension as though it is not taxable income of the year it is earned, but instead to tax the withdrawals as income of the year of receipt. The opportunity that gives to spread income is a good incentive to save; anything more complicated distorts and detracts from that basic principle, and should only be considered if it has a very good justification.

 

David Whiscombe, director of tax at UK200Group member firm BKL

By definition, retirement planning requires you to think about what is going to happen many decades into the future. So the one thing that is important above all is stability. 

Changing the rules every five minutes undermines the whole concept of pension planning.  So what have successive governments done in recent years?  Er… constantly changed the rules. I despair.”

 

www.twitter.com/uk200group.

 

Established in 1986, UK200Group is the leading mutual professional association in the UK with some 150 offices of quality-assured member accountancy and lawyer firms throughout the UK totalling over 550 partners, 150,000 business clients and global links in nearly 70 countries. UK200Group provide services and products that are designed to enhance the business performance of its members. Telephone 01252 401050, email admin@uk200group.co.uk or visit www.uk200group.co.uk.

 

Disclaimer:

UK200Group is an association of separate and independently owned and managed accountancy firms and lawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members.  Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.

 

Back to News