Pension contributions have reached a record high, which only serves to fuel the debate that the Chancellor may seek to cut pension tax relief in his Autumn Budget on 22nd November.
Nine million people contributed £24.3 billion to personal pensions in 2015/16 – the largest amount to date. Prior to this, the most contributed was in 2007/8 before the financial crisis, but even then the figure only reached £20.9 billion.
As contributions grow, the amount the government spends on tax relief inevitably increases too. The Treasury spends a net amount of £24.8 billion on tax relief (including tax take from pensions in payment), which is considerably more than the £21.8 billion before 2007/8.
The success of auto-enrolment has undoubtedly played its part in these higher contribution figures. But while auto-enrolment has resulted in more people contributing to pension schemes, it’s worth noting that the relatively low contribution levels have meant the average annual contribution per individual has fallen from £3,690 in 2011/12 to £2,690 in 2015/16.
While responsible retirement planning is obviously to be encouraged, the increasing burden on the Treasury does make it likely that pension tax relief will be a target for making savings as Philip Hammond prepares his first post-election Budget. Speculation in the past has centred on the view that he would favour a reduction in the pensions annual allowance (currently £40,000) rather than a flat rate system and not address the lifetime allowance (currently £1m)
There are arguments both for cutting tax relief and keeping it unchanged. The figures above clearly show why pension tax relief is a tempting target. However, the government has a stated aim to increase pension contributions, as not doing so could cost them even more money in supporting an ageing population in later life. The balancing act for the government will be whether a cut in relief now will deliver more into treasury coffers than it will potentially cost in later life support.
Any attempt to restrict tax relief may also result in the average amount people save falling further. The rising cost of pension tax relief is a cause for concern, but while a net annual bill of almost £25 billion sounds astronomical, average savings levels per person are way down on previous highs. It would be unfortunate if the savings culture that has been carefully nurtured through various initiatives like auto-enrolment was threatened by measures designed to raise cash in the short term in advance of Brexit. Anxieties around the cuts in various forms of relief tend to increase ahead of a Budget announcement. Past speculation has often resulted in sudden increased contributions in the weeks leading up to the Chancellor’s speech but our view is that it is typically better to react to concrete policy rather than mere conjecture. Meanwhile, if you have any questions about Group Pension provision for you and your staff or you would like to set up a review, please get in touch with your Creative consultant, or contact us at firstname.lastname@example.org.