However, according to pensions experts at LCP, despite the headline £41.3 billion quoted cost of pension tax relief, this is not simply a pot of money into which a cash-strapped Chancellor can easily dip. Based on recent work carried out by the Pensions and Lifetime Savings Association on statistics for an earlier year LCP estimates that:
- Around £1 in £7 of the tax relief bill relates to a typical £10-£15bn per year being paid by companies to clear deficits in their Defined Benefit (DB) pension schemes; applying tax in some way on these contributions would simply penalise companies who are being pressed by government and regulators to tackle shortfalls in their pension schemes;
- Around £1 in £3 of the cost of pension tax relief relates to public sector DB schemes such as those for teachers, nurses and civil servants, and most of this is on employer contributions; in the private sector, members can put off a big pension tax charge by asking the scheme to pay the bill now in return for a lower pension later; but in these ‘unfunded’ public sector schemes there is no ‘pot’ from which the scheme could pay; so either public servants would face large up front tax bills or the Treasury would get little or no upfront revenue from taxing contributions to these schemes;
- Current levels of pension saving are widely agreed to be inadequate, and further cuts to pension tax relief could undermine pension saving; with traditional Defined Benefit schemes largely closed in the private sector and contribution levels into newer Defined Contribution schemes still at relatively low levels, action is needed to boost overall pension saving rather than to discourage it.
Commenting, Karen Goldschmidt, pension tax specialist at consultants LCP said:
“The Chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3 billion for the ‘cost’ of pension tax relief. But these figures provide no excuse for a Budget raid on pension tax relief. The growth reflects millions more workers savings towards their retirement and should be welcomed, not used as an excuse for cuts. In addition, a large part of the headline cost of tax relief relates to the cost of public service schemes, where a reduction in relief would either result in big tax bills for public servants or generate little up-front revenue for the government. The tax relief figure also includes the vital contributions which firms are making to cover the shortfalls in their pension schemes which the government should be encouraging rather than taxing more heavily. Overall we need more pension saving, not less, and a raid on pension tax relief would send entirely the wrong signal to millions of people who have just started out on their pension saving journey”.
LCP also point out that these statistics should be treated with considerable caution for two main reasons:
- HMRC themselves acknowledge in the notes that “costs are subject to large revisions and have a particularly wide margin of error”
- The way in which the cost of relief is calculated is open to question. For example, the billions of pounds which companies pay to plug deficits in their pension scheme are counted in the figures but do not actually relate to individual members. A somewhat arbitrary assumption has to be made about the income tax rates to be used to convert those aggregate contribution figures into a cost of tax relief figure. HMRC replies to inquiries from LCP about the methods used suggest that the way this is done could lead to an upward bias in the figures.
