Pensions Tax and Raising Revenue

Pensions tax and raising revenue

Sir, Pension savers need stability and simplicity in pensions tax.  As recently as 2006, we were given a new “simple” tax regime, yet already half a million workers face a surprise tax on pensions (report, Sept 25). 

The current proposal to reduce tax relief is nothing to do with pensions per se, but rather one of the ways to raise extra revenue in difficult times. 

However, there is a better way that would both leave the present regime in place and increase tax receipts. 

In the past, many higher earners, encouraged by generous tax reliefs, made larger contributions than are permitted under current rules, and are now in the enviable position that they have too much of their savings in pension.  The Treasury proposed in July that those with defined contribution (DC) pension schemes should be able to draw down all of their pension when they wish, subject to tax, and provided that they keep enough pension to ensure they will never call on state benefits (called the “Minimum Income Requirement”). 

If this reform were extended to members of defined benefit (DB) schemes, higher earners could draw down their excess pensions and give back to the Exchequer the tax relief they received.  I suggest at 40 per cent.  Not only will this treat DC and DB members in the same way, it is likely to bring £20 billion in tax relief over the next five years.  Many higher earners will regard this as an acceptable price for greater flexibility on their savings.  

Relieving hard-pressed DB schemes of some of the longevity risk for those on higher pensions will reduce scheme deficits by about £30 billion, bringing better security for those on lower pensions and welcome relief for the sponsors. 

Adrian Waddingham
Senior Partner, Barnett Waddingham