A damning report published earlier this year found that nearly half of Government spending on pension tax relief is being handed out on a silver platter to the richest 10% of eligible savers.
The report from the Royal Society of Arts think-tank (RSA) – published in April of this year (2018) but which received minimal media attention – discovered that 40% of HM Treasury spending on pension relief goes to the top 10% of those claiming relief…. who each earn £70,000 a year or more.
Meanwhile, 75% of basic tax rate payers pay more into their pensions but only receive 32% of pension tax relief in return from the Government.
According to the research, higher rate payers get 53% of relief while contributing only 41%, while additional rate payers make only 8% of contributions but get 15% of relief.
The report finds that pensions relief costs HM Treasury £30.5bn a year, of which £11.8bn is spent on people earning more than £70,000 – a proverbial kick in the teeth for struggling pension savers.
RSA say this “deeply regressive” system gives basic rate payers little incentives to save, with self employed people the hardest hit, and calls on the Government to introduce a more “progressive” system.
Recommendations from the report include:
• Replacing basic (20%), higher (40%) and additional (45%) pension relief with a single flat rate of 30% in order to encourage basic rate payers to save.
• So a worker on £15,600 who contributes 5% to a personal pension (£780) would see her tax relief climb from £195 a year to £335, a 70% increase.
• Likewise, a worker on £30,000 who contributes 5% of her salary to a personal pension (£1500) would see her tax relief climb from £375 a year to £645.
• However, a worker on £60,000 who contributes 5% of her salary to a personal pension (£3000) would see her tax relief fall from £2,010 to £1,290.
Benedict Dellot, report author and Associate Director for Economics at the RSA, said: “Our research debunks several mythical solutions to the pensions crisis, including that the self-employed are saving instead into ISAs—they aren’t, can rely on their partners’ pensions—they can’t, or have found a better savings vehicle in the form of property—they haven’t.
“In short, the self-employed cannot save money they do not have. Nor can they rely on employers’ contributions when they do not have an employer. Cajoling them to bank more money for their retirement is likely to fall on deaf ears.
“Overhauling tax relief is the only way to move the needle on saving rates and help the growing ranks of the self-employed avoid destitution in older age.”
According to the RSA, only one in five self-employed currently pay into a pension, despite making up one in six UK workers, and 45% have no pension at all.
Matthew Taylor, chief executive of the RSA and author of the Taylor Review, added: “Given they now make up one in six workers, it is time to stop assuming the self-employed are also self-sufficient.
“As my Review on Modern Employment for the Prime Minister made clear, the rise in self-employment isn’t ‘good’ or ‘bad’ in itself, provided the state acts to address the downsides.
“The Treasury should deliver on the Prime Minister’s vow to prioritise ordinary working families, rather than the wealthy, when it comes to tax, and act for the real Middle England—hairdressers and taxi drivers on low and middle incomes, not top earners like me on £70k plus who the system currently subsidises.
“Overhauling an outdated and indefensibly regressive system, alongside introducing Collective Defined Contribution pensions, would showcase the government’s serious commitment to social reform.”