Changing the way pensions are taxed could increase the amount the Government can invest in UK growth by over £20bn a year, potentially adding up to £100bn over five years, analysis from Hymans Roberston has revealed.
Under the current pensions tax relief system, the Government provides tax relief on pension contributions as an incentive to save in pensions, meaning that, for every pound a typical worker, paying basic rate tax, saves, 20p is tax relief.
However, Hymans Robertson pointed out that this pension money, including the £200 incentive, is then often invested overseas, meaning that when workers retire, the majority of the tax relief is expected to be “clawed back” by the Government as most workplace pension income is taxed in payment.
“In fact, the typical worker who paid £800 into their pension will return £150 of their £200 ‘incentive’ to the Government through tax,” Hymans Robertson head of pensions policy innovation, Calum Cooper, pointed out.
“This leaves them with only £50 of extra money in their final pension pot.”
Instead, the firm’s report, A Pensions Plan for the New Government, suggested that the Government should look to reduce upfront tax relief on pensions, and make pensions tax-free at the point of retirement.
This would mean that the tax relief provided over time would remain the same, and the level of expected net income received by pension scheme members could stay the same when they retire. This approach is not expected to impact company profits either.
According to Hymans Roberston, this would also see the Government gain “billions of pounds” from tax on pensions contributions right now, whilst still ensuring that individuals don’t lose out as they would not be paying tax on their pensions later in life.
In particular, Hymans Robertson estimated that the £150 of upfront tax would add up to more than £20bn per annum of extra income to the Government now, which it could look to invest, for example in the National Wealth Fund and net-zero aligned sectors, and UK communities and growth.
“This could materially accelerate much needed investment in the UK and could keep expected pension income at retirement and take-home pay unchanged without costing anything more for employers,” Cooper said.
“Because future pensions would be tax free, it would make it simpler and more certain for people to plan for later life.”
