The Government has repeatedly expressed its concern, both in the 2015 Budget (paragraph 1.232) and in the recently announced consultation on pensions tax relief, at the level of income tax forgone through the provision of pension tax relief. This concern is compounded by Government’s claim that two-thirds of pensions tax relief currently goes to higher and additional rate taxpayers. This split of relief is likely to fall as reductions of the Lifetime Allowance and Annual Allowance continue to bite. I question the grounds for the Government’s concern, over both the level and distribution of tax relief, though.
HMRC has confirmed, in response to a Freedom of Information request, that it does not record whether a pension scheme is a defined benefit scheme or a defined contribution scheme. Consequently, how is it possible to break down the tax relief provided on contributions? This lack of granularity as to who benefits from the tax relief makes it difficult to forecast aggregate levels of future relief as well as the distribution of such relief.
Around 50% of the tax relief granted each year relates to employer contributions to occupational schemes. A material proportion of these contributions, and related tax relief, is in respect of defined benefit schemes. UK occupational defined benefit schemes are, in aggregate, under-funded by over £220 billion (based on the Pension Protection Fund’s (“PPF’s”) estimate at the end of June 2015. This estimate understates the true shortfall as it is based on the restricted benefits that would be paid by the PPF rather than the full benefits promised by the underlying schemes). Although sponsoring employers are the ultimate guarantors of these schemes, short of the schemes falling into the PPF, and consequently have to make up the shortfalls on these schemes, providing tax relief on these contributions does help ease the financial stress of making these contributions. Reducing the tax relief potentially places under-funded defined benefit schemes, and arguably the PPF too, at further risk than is currently the case.
It is possible to more easily forecast the level and distribution of future tax relief in defined contribution schemes, if only insofar as contribution-related relief is concerned. Restricting reliefs to (members of) defined contribution schemes only addresses part of the issue of the magnitude of pension tax relief. Defined contribution schemes already operate under a handicap relative to defined benefit schemes in the way that the Annual Allowance and Lifetime Allowance are calculated. Does Government want to further weaken the relative attractiveness of defined contribution schemes, at a time when these schemes deliver the bulk of future provision?
The Government does acknowledge that the income tax deferred by pensions tax relief is ultimately recovered, to an unknown extent relative to the reliefs originally granted, by income tax paid on pension income. These income tax receipts have been rising at a rate in excess of the rate of growth in relief granted in recent years. However, tax on pension income is not the only source of tax revenue generated by the pension-related sector. The greater the level of savings built up within the sector, the greater the fees generated by these savings. These fees give rise to corporation tax as well as employment and personal taxes in respect of those active in the industry. My personal conflict of interest, as a member of the industry, is clear but this wider contribution to tax receipts does need to be factored into the debate. I am not aware of these wider taxes having been considered to date.
The issue of taxation is often the cause of heated debate. The current discussions around pension tax relief are no exception. A balance needs to be found between incentivising private provision of sufficient savings for later life and the cost of such incentives, to the extent these costs can be calculated. Current levels of provision are inadequate and worsening the situation is not in the long-term interest. If decisions are to be taken on the basis of statistics, how about heeding Disraeli’s warning against using such data for support rather than illumination?