Green Paper Response

Complexity is deterring wealthier individuals from saving through pensions, says Matt Phillips, Managing Director of Thomas Miller Investment 

In a response to the Government’s green paper on pensions tax relief, Matt Phillips, Managing Director of Thomas Miller Investment, argues that complexity is a deterrent to saving for a pension, that there should be tax relief on financial education, and the £1m Lifetime Allowance for tax relief on pension contributions represents a tax on investment performance. Key points from his response are:

Do not remove tax relief from pension contributions: Using an alternative system of Tax-Exempt-Exempt (T-E-E) would require faith by the general public that a future government would not impose tax on taking retirement benefits.  It is questionable whether this faith would exist and therefore act as a reason for individuals taking less personal responsibility. 

Complexity: For those who face Lifetime Allowance and Annual Allowance issues the current system is very complex. An increasing number of key decision makers in businesses are being dis-incentivised, through complexity, to save through pensions. 

Remove the Lifetime Allowance: With contributions capped at £40,000, the Lifetime Allowance no longer works as a mechanism to recoup excess tax relief provided.  It is now a tax on investment performance.  This is both unfair and acts as a disincentive to make savings into pensions.

Set a uniform rate of tax relief: The proposed tapering system for additional rate taxpayers is very complicated, especially for active members of defined benefit pension schemes.  The amount that can be contributed should be set at £40kpa for everyone and a uniform rate of tax relief set to offset the cost to the taxpayer. A uniform tax rate of 30% would make system affordable, reduce complexity, redistribute tax relief to the lower paid and create a fairer system.

Financial education: The most effective method of encouraging savings would be for the Government to use the tax system to encourage financial education.  Currently advice on pensions can be given to an employee up to £150pa without it creating a p11d benefit. This allowance should be expanded to cover all sources of retirement income and raised to £500pa.  In the 10 years before state pension age the limit should be raised again to £1,000pa to reflect the added complexity at retirement. 

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The value of your investment can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns. Prevailing tax rates and relief are dependent on individual circumstances and are subject to change.

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