The Association of British Insurers has called for pension tax relief to be simplified, in order to reduce savings inequalities.
This call for government action comes after the ABI commission a report by the Pensions Policy Institute on this issue. This found that the current system benefits higher earners and was less favourable to women, the lower paid and younger workers.
The PPI research says moving to a single flat rate could distribute tax relief more evenly.
The research highlighted a number of inequalities. For example it found that people paying basic rate tax make up 83.4 per cent of total taxpayers but only receive 26 per cent of the pensions tax relief related to the DC pension contributions.
The report said that the number of people earning less than £30,000 who now qualify for tax relief has increased – from 52 per cent to 62 per cent – due to AE bringing more lower earners into workplace pensions. However despite this increased number only 24 per cent of the total tax relief goes to this group.
Meanwhile 42 per cent of people who contribute to a DC pension are under 40 – but they only receive 27 per cent tax relief.
The report also found that 72 per cent of the pension tax relief paid on DC pensions goes to men.
The ABI added that this this skew towards those on higher incomes is magnified because as well as being entitled to a higher rate of relief, they are also likely to have more cash available to put in their pensions than lower earners.
PPI head of modelling Tim Pike says: “While automatic enrolment has significantly increased the number of low earners benefiting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more.”
The ABI said a simpler system that was fairer system to all earners would encourage saving for retirement.
Commenting on this report The People’s Pension director of policy Gregg McClymont says: “We welcome the report by the ABI as it has long been known that higher rate earners disproportionately benefit from pensions tax relief – half of the £37.2bn paid out goes to higher rates tax payers.
“Targeting a lower, flat rate of 30 per cent would be much fairer and would help lower earners boost their retirement savings. This proposal would be broadly revenue neutral for the Treasury and would be best considered by a new independent Pensions Commission as part of its remit.
“Pensions tax relief is notoriously complex and must be simplified and made fairer.”
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