• Official Government figures reveal incentivising pension saving through tax relief cost the Exchequer £38.4 billion in 2017/18
• When income tax paid on pension withdrawals is taken into account the net cost was £20 billion
• Both figures are an increase on 2016/17 although down from the peak seen in 2015/16
• In a recent select committee hearing Chancellor Philip Hammond described pension tax relief as “extraordinarily generous” and “heavily skewed to the better off in society”
Tom Selby, senior analyst at AJ Bell, comments:
“The cost of pension tax relief is enough to make any Chancellor wince but it is interesting that the roll out of auto-enrolment has not increased the cost to the Exchequer over the past couple of years.
“Context is also hugely important when deciding whether this is money well spent. Even with auto-enrolment and recent increase in minimum contributions to 8% of relevant earnings, most people are not saving enough to guarantee a comfortable retirement.
“The Chancellor is right to say pension tax relief is ‘extraordinarily generous’ and at this juncture the focus needs to be on getting this message across to people so they save more for their futures.
“The combination of a minimum 25% savings bonus which you can access at 55 (rising to 57 by 2028) with 25% tax-free is hugely attractive, and all parts of the industry need to do better at communicating this fact.
“The Government also has a role to play in ensuring people make the most of the retirement savings incentives on offer. The constant chipping away at allowances and creeping complexity for higher earners has led to a perception the system as a whole is impenetrable.
“It’s hard to imagine anybody designing a retirement savings system from scratch today would opt for three different annual limits as well as a lifetime limit to control costs.
“With Brexit making it impossible to get any meaningful legislation through, Government should use this opportunity to consider how the savings system can be simplified. Given the controversy it has caused with NHS consultants, an obvious first step would be to scrap the horrendously complicated taper altogether.”
