Pensions have been something of a political volleyball over the last twenty years or so since ‘A Day’ on 6 April 2006. A variety of different governments have tinkered with rules and so many reforms have been announced that rarely does a budget go by without rumours of another pension rule change. For those in the tax profession, it is almost now a cliché to include the restriction of income tax relief on pension contributions on your list of budget predictions.

If the Chancellor does find herself leaning over a fiscal precipice in November, she could face the unenviable task of wrestling with the issue of pension tax relief, even if she does not really want to. It is something her predecessors may have been tempted to explore in the past but ultimately shied away from due to the complexity associated with it. There is also the impact any pension tax changes might have on the public sector to take into account as inadvertent consequences may arise.

As we have highlighted previously however, there are a number of costly ‘non-structural’ tax reliefs, including income tax relief on pensions and relief from National Insurance contributions on employer contributions. Along with the most expensive relief of all, relief from capital gains tax on someone’s main home, it has been no surprise to see speculation of reforms on all of these tax reliefs.

However, just because tax reliefs are theoretically costly to the Treasury does not necessarily make them appropriate targets, assuming that is not the only metric you are concerned with.

Whilst it came as an unwelcome surprise for those who were relying on it, the announcement of unused pension funds being brought within the scope of UK inheritance tax from 6 April 2027 was arguably easier for the government to justify. It is difficult to dispute the fact that some pension pots were effectively being used as a vehicle to pass on assets to the next generation free from inheritance tax, rather than to provide a pension income during retirement.

The removal of inheritance tax relief may not act as a significant disincentive to many pension savers but the same may not be true of restricting income tax relief. The government cannot afford a misstep here as its own research indicates that nearly 15m people are under-saving for their retirement.

One of the objectives of the recently established Pensions Commission is to explore the reasons behind this. Rushing into ill-judged pension tax reform may not only undermine the Commission’s current work but we, as a country, run the risk of compounding the issue that younger generations are not sufficiently funding their pension pots.

That is not to say that there is not a debate to be had on the subject. There is a reasonable case for some form of pension tax reform. The status quo of pension tax reliefs may not represent a barrier to savers but given it is recognised that pensions saving needs to increase, the current tax measures are arguably falling short on the objectives they are meant to achieve.

It could be contended that the current reliefs are too far skewed towards higher-earning taxpayers and the mechanism by which higher rate tax relief is given for personal pension contributions means that it does not even sit in the pension pot itself anyway. It effectively provides additional tax back on income that can be spent now.

Ultimately pension saving does not appear to be chiming with a younger generation whose primary focus is often on having access to capital to reach that first rung on the property ladder and beyond. If there is to be reform of pension tax reliefs then there may need to be some form of quid-pro-quo for savers.

That could take a number of forms, with some suggesting a flat income tax relief rate of 30% to incentivise basic rate taxpayers or perhaps an expansion and increased role of Lifetime ISAs (LISAs), which can provide tax uplifted savings for the purpose of buying a first-time home or retirement. There are seemingly unnecessary restrictions, such as a requirement to set one up by 40 years’ old and limiting contributions at 50 years’ old. One option may be to remove such restrictions and to increase the amounts that can be contributed, perhaps with some form of limitation for higher earners as there is for pensions savers to prevent abuse.

Ultimately, it is important that short-term pressures of the budget do not unduly influence what should ideally be a long-term strategy. Patching an economic pothole now with additional pension tax receipts could contribute to larger problems down the road.

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