Flat-rate pension tax-relief proposals are no ‘silver bullet’

Flat-rate pension tax-relief proposals are no ‘silver bullet’, the managing director of a retirement practice has warned its supporters. The government is weighing this up as one potential option for further reforms of the pensions system as well as ISA-style pensions.Towers Watson has warned against both ideas, however, and urged policymakers to avoid being seduced by arguments suggesting that a flat-rate of tax relief would be a simple and fair solution.Many industry commentators have been critical of the ISA style pensions idea.{desktop}{/desktop}{mobile}{/mobile}It would mean a radical flipping of the tax system to more closely resemble ISAs, where 100% of contributions would come from post-tax income.Some of these critics have suggested an alternative, under which the current system would be tweaked to provide a flat rate of tax relief, rather than tax relief at the individual’s marginal rate, and continuing to tax the pay-out.John Ball, managing director of Towers Watson’s Retirement Practice in EMEA, said: “One thing that’s clear is that this proposed flat-rate tax relief system is not the silver bullet that some in the industry think it is.“Considering this purely in respect of defined contribution savings (additional complexities exist for defined benefit), the risk of erosion of tax reliefs might actually be greater than under the matched-ISA model.“Many supporters of flat-rate relief favour presenting this as a government matching contribution, in much the same way as the matched-ISA model. Some also propose that flat-rate relief would apply only to personal, not employer, contributions. However, we believe that such a differential in tax treatment would complicate the messaging to consumers and would result in significant arbitrage opportunities.“The incentives under this model of flat-rate relief are no clearer than under the matched-ISA approach; arguably, they are less clear because an individual would need to factor in the impact of tax on emerging benefits.”The risk of double-taxation is just as great, he believes, and could be more vulnerable to government tinkering.He said: “We agree that the current pension taxation regime does need simplification, but we believe that this is both possible and practical within the existing taxation system. Removing the annual allowance control from DB pensions and the lifetime allowance from DC pensions would be genuinely deregulatory – a very much welcomed simplification for consumers.”

Flat-rate pension tax-relief proposals are no ‘silver bullet’

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