Over the summer the Treasury asked interested groups and people from around the country to have their say on how pensions ought to be taxed.
We responded by defending the current principle of up-front tax relief on money you put in. And we pushed for better communications, new incentives for young and low-income people to save and called for a solution that people believe will stand the test of time.
At first, pension taxation might seem unglamorous, but by providing tax relief, the government forgoes something in the region of £45–50 billion in tax revenue each year – the same amount we spend on defence, or nearly six percent of all government spending. It is a crucial part of one of the largest financial undertakings we make in life, and getting the system right is vital for how we will all live in retirement.
The consultation was open to a range of possible changes to pension taxation but the main change proposed is moving from a system where you:
- pay no income tax on the money you put into your pension,
- also pay no tax on the money the pot grows when your pension provider invests it,
- but are taxed on the income that you get from your pension pot in retirement…..
…..to one like an ISA where you:
- pay tax on the money you save,
- are not taxed on investment income,
- can withdraw from your pension pot without paying any tax.
In The Money Charity’s response, we argue that we need an incentive to pay into our pension up-front. Tax relief does that – you get to keep your own money! And taxing pensions when we are getting income from them is not going to deter anyone from saving.
On top of that, the UK needs a concerted public education campaign to explain what the system can provide and let us know what extra we can get if we save into our pension pots.
If this process ends with a major change to the way pensions are taxed, after last year’s ‘pension freedoms’ it will be the second transformation in what a pension means in less than five years. We build up our pension pots for 30-40 years, this rate and scale of change means could mean that we’ll retire into a situation where pensions are completely unrecognisable.
Unless the government gives us certainty, we can’t plan properly and can only put money away and hope for the best. It is crucial that any change is seen as a ‘generational settlement’ – something that is financially and politically sustainable. Only that way can we plan for our future with any certainty.
If you are interested in our view in more detail, please read The Money Charity’s response to strengthening the incentive to save. You can read the Treasury’s consultation paper here.