Pension savers in the UK benefit, and have done so for some time, from tax relief on their contributions. This perk has been a key driver in incentivising these savers to defer a portion of their earnings for later in life. Government seems concerned “that some pension savers are unaware or not motivated by the tax benefits associated with paying into a pension” and is consequently consulting as to potential alternative arrangements.
Could it be that the reason why savers are not aware of or motivated by the tax benefits already on offer is relatively simple? Have these savers been told how much benefit from this tax break they have accrued each year and/or their whole working life? I am agnostic as to who breaks the good news to the saver but why not shout about it? The easier it is to understand the benefit, the more likely it is to be valued. I think that a note from HMRC, in physical or electronic form, quantifying the benefit would lead to greater engagement from savers. Providers might be the bearers of these good tidings too but savers might be looking for the catch in this instance.
The Automatic Enrolment campaign makes explicit reference to the tax breaks available from contributing to a pension. Anecdotal evidence suggests that the tax break is a contributing factor to lower than anticipated opt-out rates. Could these opt-out rates be reduced even further if prospective savers had a ‘Pounds & Pence’ indication of the specific incentive available to them? Peer influence could also be created by existing savers being able to easily understand, and communicate, the extent to which they had already benefitted from the support.
The most effective solution is sometimes the simplest. Is a large scale consultation, with the attendant cost and uncertainty, necessary to get pension savers to appreciate the valuable tax incentive they already have access to? Perhaps Government might have been better served by testing the reaction to spreading some good news. Is an overhaul of the pensions tax relief regime required or will effectively communicating the benefits get the job done (with less cost and disruption)?