Back in 2015, when reform of the pension tax relief system was under a consultation

“Strengthening the incentive to save: consultation on pensions tax relief – GOV.UK (www.gov.uk)”

the Government requested Ipsos Mori to research how much the general population understood this “savings incentive”. The report was not published but has been mentioned in Parliament, prompting a Freedom of Information Request which has brought this document to light. As ever, the FT appear to be involved.

More than half of individuals did know know about pension tax relief finds UK Govt research https://t.co/ZQovMcIe5t

— Josephine Cumbo (@JosephineCumbo) April 15, 2022

The report had Key findings  from a survey of 703 British adults aged 16–55.  In summary it finds that tax relief has limited impact as a savings incentive

Many people are not especially aware of the tax system in place for pensions.

▪ Four in ten (41%) adults aged 16–55 correctly believe that the Government tops up people’s pension contributions through tax relief. A quarter (26%) think the Government provides no top-up, and a third (33%) do not know.

▪ When those with pensions who are aware of pension tax relief are asked how much the Government has topped up their contributions to date, the mean response is by around 8 per cent for basic rate taxpayers (vs. 25% in reality) and 18 per cent for higher or additional rate taxpayers (around 67% in reality).

(The Government contribution for basic rate taxpayers is 20p for every 80p an individual saves, which amounts to a 25% top-up. For higher rate taxpayers, it is 40p for every 60p saved, which amounts to a 66.6% top-up).

Improving awareness of the Government top-up may encourage more people to save into a pension.

▪ Among those with pension savings who are aware of pension tax relief, six in ten (57%) consider it to have been an important factor in their decision to invest in a pension.

▪ Among those currently unaware of pension tax relief, two-thirds (66%) say they would be encouraged, at least by a little, to start or increase their pension saving if they heard that pension contributions were tax-free.

There were some marked differences in awareness between those doing things for themselves (non-workplace) and those saving through the workplace. Men were more aware than women, the older were more aware than the younger, higher rate tax-payers more aware than those on lower-rates.

The report found that given their lack of awareness, most people are open to change, although they would not necessarily save more under either of the alternative systems explored in this research (either a flat rate Government top-up to contributions set at 30%, or people being able to withdraw their retirement income tax-free alongside a lower Government top-up of 20%).

▪ Six in ten (59%) say that either alternative is better than the existing system. When comparing one alternative system against the other, the picture is more mixed, with over four in ten (45%) saying no tax on retirement (and a lower top-up) is better and three in ten (28%) saying the flat rate system is better.

▪ Three in ten (28%) think the flat rate system would make them increase the amount they personally save for retirement, and one-third (34%) think this of the tax-free retirement option. In both cases, the majority (64% and 58% respectively) think these different systems would make no difference to the amount they save.

Under any system, there is an appetite for better information to help people understand how much they need to save to be able to have the kind of retirement they envisage.

▪ Among those who have pensions and remember receiving pension statements, six in ten (62%) think it would be very useful to have their statements tell them what they need to save to live comfortably, and five in ten (53%) think it would be very useful to know how much their retirement income would rise from paying an extra £20 a month.

▪ Having information on how much people of a similar age and income save on average is deemed less useful, with only two in ten (20%) rating it very useful.

Conclusions

The Ipsos Mori report came to the following conclusions

This research shows that much of the public lacks awareness of the pension tax system and considerably undervalues the existing Government contribution to pension pots. In this context they are open to alternative systems, particularly if they feel they can better understand how these systems work.

Of course, these initial preferences may fall away as people become better informed, with the qualitative research finding that views of alternative systems often become more muted and contested once people reflect on the relative merits of system already in place, including features of which they presently lack awareness.

Moreover, in their preferences, people are not solely interested in choosing a pension tax system which makes them financially better off – they are also interested in simplicity and clarity and would not necessarily save more under alternative systems.

The findings highlight that people ultimately want to better link the amount they save to what they will receive in retirement, and therefore would support any system seen to simplify this, as well as any further information that can help them to better anchor pension saving, i.e. understand how much they need to save to be able to have the kind of retirement they envisage.

Yet better information provision will be challenging, as many in key subgroups do not engage regularly with their own pension arrangements.

Finally, it should be noted that raising awareness of the existing pension tax system or even adopting an alternative one may not, in isolation, address other significant barriers to pension saving.

The impact of any communications or changes will be set against competing demands on people’s incomes, as well as some people’s perceptions of pensions relative to other ways of saving, including investing in property or in other savings products such as ISAs

 

What happened next

Shortly after the conclusion of the consultation , Britain voted on Brexit. It was generally reported that a major policy initiative such as the reform of pension tax relief had the potential to disrupt not just the Conservative Parliamentary party but also its bedrock vote, for whom pension tax-relief was important.

The findings of the Ipsos Mori report, which showed that the majority of lower earners were not aware of what was on offer and would not greatly value radical change, suggests that at such a sensitive time there was little for a Government to win and much to lose , from implementing some of the radical measures under consideration.

Since the 2015 consultation closed, there has been minor tinkering with some of the tax allowances and a promise that by 2025, all those saving into workplace pensions will get the 25% top up (not just those in relief at source schemes).

However , radical reform of pension tax-relief has not gone ahead and the pension taxation system remains primarily a “rich man’s perk”.