Pension changes may be enacted by Rishi Sunak as Britons ‘unaware’ of benefits | Personal Finance | Finance
Analysis published by HM Revenue and Customs (HMRC) this week has shown wage inflation is likely to drive tax relief on pension contributions higher in the years ahead. The official data showed total pensions tax relief was £52.6billion in the 2021/22 tax year.
This included £26.9billion income tax relief, and £24.7billion relief from National Insurance contributions.
It is expected pension income tax relief will rise to £27billion in the 2022/23 tax year, as wages rise.
While tax relief can offer significant benefits, the Government pointed to a lack of awareness of the benefit among workers from a 2015 study.
It said: “HMRC commissioned independent research with individuals and employers on pension tax relief in 2015.
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“The research concluded only 41 percent of adults correctly believed that the government tops up people’s pension contributions through tax relief.
“Many people underestimated the amount of tax relief the government provided on pension contributions.
“Given their lack of awareness, most people were willing to consider an alternative pension tax system, although this would not necessarily change the amount they saved.”
With this in mind, experts have speculated about the future of pension tax relief.
Becky O’Connor, director of public affairs at PensionBee, said: “The Government’s evaluation of pension tax relief as a benefit people are mostly unaware of suggests the system may be on the slab for changes.
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If this year marks changes for tax relief, Ms O’Connor suggested they should not stand alone.
She added: “If 2023 is the year it happens, it would be good to see other policies, such as raising the auto-enrolment minimum, coming in, to protect people’s retirement outcomes at a time when it is harder than ever to build up long-term wealth.”
Other experts have suggested the challenge of an ageing population may also put strain on the concept of pension tax relief.
Tom Selby, head of retirement policy at AJ Bell, said: “At some point, the Government will need to consider how to boost average pension contribution levels – although the pressure being placed on people’s incomes by spiralling inflation means that is unlikely to be a priority in the short-term.
“As we edge closer to the March Budget and with the Chancellor looking for cost savings, these latest figures will inevitably be seized upon by some as evidence pension tax relief should be fundamentally reformed.
“Discussions about the future of pension tax relief need to be focused squarely on ensuring more people are encouraged to save a decent amount for their financial future.
“Raiding pensions for short-term gain without considering the potential long-term consequences – something we have seen far too much of in the last decade – would risk undoing the early positive impact of auto-enrolment.
“Given the financial challenges facing millions of people already, saving for retirement likely already feels like a stretch for many. Any shift in the rules which undermines incentives to save for the long-term would risk being the straw that breaks the camel’s back.”
In the past five years, the cost of pension tax relief has drastically increased by approximately £15billion.
The Prime Minister and Chancellor will therefore be faced with a difficult dilemma as the Budget approaches.
They may not wish to alienate older voters, but will also need to find cost-cutting measures.
However, Mr Selby suggests pension tax relief could present somewhat of a solution to the growing state pension bill.
He added: “Every pound saved in a pension should help reduce the risk of that individual falling back on the state in their later years.”
