Strengthening the incentive to save. A consultation response on tax relief
The NAPF has responded to HM Treasury’s consultation on the taxation of pensions.
The NAPF shares the Government’s desire to get more people saving more for their retirement but warns there are significant risks associated with a move to either TEE or a single rate. Instead, the NAPF urges the Government to focus its efforts on securing and building on the success of Automatic Enrolment as we reach the crucial point for millions of small employers starting to enrol their employees for the first time.
The NAPF argues that, over the long term, a move to a pensions tax regime of either ‘taxed, exempt, exempt’ (TEE) or a single rate jeopardises both pension saving and the tax revenues of future governments. Furthermore, separating DB from DC, while initially appealing, is impractical and will introduce more complexity over time. No change to the system is the most appropriate solution if we want to continue to: support automatic enrolment; sustain employer engagement in pensions; allow low earners to benefit from cross-subsidies from higher earners in schemes; deliver private incomes in later life; and protect future governments against increased dependency on the state.
While the Chancellor may raise more tax revenue in the short term by a change to pension tax but there is no evidence to show that savers would save more or take greater personal responsibility for their incomes in retirement as a result of further changes to the system.
Therefore, a review which seeks to address tax relief in isolation can only provide a partial answer. Worse, it risks being counterproductive if it overlooks the unintended consequences in other parts of the ecosystem which supports retirement income and planning. We urge the Government quickly to follow this consultation with a thorough, independent review of pensions and retirement policy in the round so that we can seek sustainable solutions which continue the alignment of Government (both current and future), savers, employers, industry and broader society which has driven the success of automatic enrolment so far.