From the TUC

Pensions Company Aviva join call for cut to higher rate pension tax relief

07 Oct 2009, by in Pensions & Investment

The TUC made the headlines with our analysis of the cost of higher rate tax relief on pensions.

Now insurance company Aviva have called for the abolition of higher rate tax relief with the money saved to provide tax relief of 30% for all pensions savings.

This would mean that only those earning quite a bit above the start of the higher rate band would lose. All standard rate payers and higher rate payers earning just above the higher rate would gain.

It’s an interesting proposal.

The Times report has a tremendous “They Just Don’t Get It” to finish however:

Tom McPhail of Hargreaves Lansdown, the financial adviser, said: “The proposal to realign the tax relief will not be at all popular with higher rate taxpayers, who must be increasingly feeling as if they are being forced to bear the entire weight of the Government’s economic woes on their backs.”

I rather think those who have lost their jobs might have something to say about that.

6 Responses to Pensions Company Aviva join call for cut to higher rate pension tax relief

  1. Geraint Day
    Oct 7th 2009, 3:42 pm

    The Hargreaves Lansdown financial adviser apparently has his priorities wrong. He weeps for the rich. Ugh.

  2. Tax Research UK » They just don’t get it
    Oct 8th 2009, 9:25 am

    […] Pensions Company Aviva join call for cut to higher rate pension tax relief | ToUChstone blog: A publ…. […]

  3. They just don’t get it | called2account
    Oct 8th 2009, 10:40 am

    […] Pensions Company Aviva join call for cut to higher rate pension tax relief | ToUChstone blog: A publ…. […]

  4. Calvin Allen
    Oct 8th 2009, 6:32 pm

    Let me declare a self-interest first: a lot of Connect members are higher-rate taxpayers. But, even then, in the terms set by Aviva, I’m not sure that standardising tax relief at a suggested 30% has much to commend it: firstly, what is understandable about the system of tax reliefs is that you get relief at your marginal rate. Breaking that understanding doesn’t simplify the system in the way that Aviva seeks. And, secondly, there are huge transitional issues unless the harmonised rate applies only to new entrants to the workforce: explaining to higher rate taxpayers that their reduction in relief is compensated for by the higher relief attained when they were standard rate taxpayers, when they themselves didn’t actually get such higher relief, is a non-starter, frankly.

    And, while I’d agree that we do need to do more to encourage people who are lower-paid to save for their retirement, or to improve their position once in retirement, there are surely other (and better) ways of doing this than through the tax relief system.

  5. Nigel Stanley

    Nigel Stanley
    Oct 8th 2009, 9:24 pm

    Calvin

    The fundamental question here is why should it cost a higher rate tax payer (such as myself) 60p to put a pound into a pension, while it costs a standard rate tax payer 80p.

    The net result of this is that ordinary tax payers put far more into the pensions of the minority of the workforce who pay tax at the higher rate than they do for those who only pay tax at the standard rate.

    I’m not saying the Aviva proposal is necessarily the best way to rebalance the tax system – and I see the political advantages of getting broad support for any change from those who are not very far into the higher rate tax band.

    It may very well be for example that putting all the money raised from the rich though limiting pensions tax relief into boosting the pensions of ordinary pensions savers might not be the right priority given the need in the medium term at least to start to reduce the deficit.

    The big issue is tax avoidance by those earning significantly more than the higher rate tax band, and we need more than changes to pensions tax to change this.

    On simplicity I don’t believe most people understand the tax system very well and one merit of Aviva’s proposal is that every tax payer would get 30p put into their pension for every 70p they saved. That is simpler.

    I’d be interested in your ideas to encourage the lower paid to save more other than by matching savings through the tax system. Employers could of course do more too, but no government is going to want to reopen the 2012 settlement on that during a recession and its aftermath.

  6. Calvin Allen
    Oct 12th 2009, 6:31 pm

    Thanks Nigel,

    I think the proposal for a 30% rate might have some merit in the specific context of the level of people’s understanding of the government/state contribution were it to be abstracted completely from HMRC taxation considerations – i.e. along the lines of the government/state providing a level of contribution for saving in a pension scheme. As iniquitous as it might seem in terms of the net costs to standard and higher-rate taxpayers, tax relief comes at the marginal rate and I do continue to believe that does make sense within the confines of that system.

    Accept your point about not re-opening the pensions settlement but see no reason to stop reminding employers that that same settlement is predicated on the basis of minimum contribution figures – that they could do more, if they chose.

    Without having at all looked at the costings then, as regards what I’d do for lower-paid savers, I’d provide additional support through off-setting contributions against NI (a different sort of tax, I know!). I’d also use some form of income threshold to ensure genuinely low-paid people qualified, probably along the lines of the median income found for middle Britain. I’d also allow low-paid ex-students to off-set pension contributions against student loan repayments, on the grounds that saving for the future in retirement was a more worthwhile public policy goal than seeking the repayment of public finances taken out for courses of study.

    Small, but valuable, steps for some people – although we do also urgently need that re-building of the system of occupational pensions saving to which I know the TUC is committed.