Personal pension contributions hit a record high in 2016/17 with £24.6 billion being paid into personal pensions – up from £24.3billion in 2015/16
Cost of tax relief inevitably follows suit – increasing to £38.6 billion from £38.5 billion
Net cost of tax relief – which takes into account tax taken from pensions in payment – in 2016/17 was £25.2 billion (2015/16: £25.1 billion)
Introduction of the tapered annual allowance for high earners looks to have offset increasing contributions from auto-enrolment
Tom Selby, senior analyst at AJ Bell, comments:
“While most would have expected the tax relief bill to soar as automatic enrolment continues to be rolled out to millions more employees and employers, it appears the introduction of the annual allowance taper – which reduces the pension savings incentives for higher earners – has stemmed the tide somewhat. That said, the cost is likely to spiral ever higher as minimum auto-enrolment contributions are scaled up from 2% today to 8% from April 2019.
“On one hand, an annual bill £25.2 billion and rising could be viewed as increasingly unsustainable. On the other hand, average pension savings levels in the UK remain far too low. Pulling the tax relief rug from under the system now – just as minimum auto-enrolment contributions edge northwards and people get used to the idea of sacrificing some of their hard-earned salary for retirement – would be a huge risk and could potentially undermine the entire reform programme.
“The Chancellor’s decision to turn the Spring Statement next month into something of a non-event – certainly from a tax perspective – should mean pension tax relief is spared, at least for now. Indeed, it’s possible the energy-sapping nature of the Brexit process will mean savers enjoy a period of relative stability on the pensions front during this Parliament.
“There is more policymakers could do to embed certainty into the UK pensions system, however.
“By establishing an independent savings commission similar to the Turner Review that eventually spawned auto-enrolment, we could begin to foster lasting cross-party consensus on the shape of pension saving incentives. If this could be achieved we might move permanently away from the pantomime politics that usually precedes a Budget statement, with savers often reacting to a blizzard of rumour and speculation.
“Failing to address this now will be a huge opportunity missed. At a time when the Government is often accused of naval gazing, the Chancellor could show a genuine long-term commitment to delivering stability for savers.”