Call to end 40% flat rate pension relief

The Royal Society of the Arts (RSA) is calling for a new approach to pensions relief to offer more support for lower earners and the self employed, saying that three quarters of workers would be better off if the government introduced a 30% flat rate

The think tank says 40% of government spending on pension relief goes to the top 10% of those claiming relief, who earn £70,000 a year or more and make up 24% of pension contributions.

Basic rate payers, 75% of those claiming any relief, pay more into pensions (51%) but get only 32% of pension tax relief.

Its report, produced in partnership with e-commerce marketplace Etsy, claims this ‘deeply regressive’ system gives basic rate payers fewer incentives to save, and especially hurts the growing ranks of the self-employed, who earn less than the average employee and have no employer topping-up their pension.

The RSA proposes replacing basic (20%), higher (40%) and additional (45%) pension relief with a single flat rate of 30% to encourage basic rate payers to save. So a worker on £15,600 who contributes 5% to a personal pension (£780) would see tax relief climb from £195 a year to £335, a 70% increase.

Likewise, a worker on £30,000 who contributes 5% of salary to a personal pension (£1500) would see tax relief climb from £375 a year to £645. However, a worker on £60,000 who contributes 5% of salary to a personal pension (£3000) would see tax relief fall from £2,010 to £1,290.

The RSA's analysis suggests three quarters of people would be better off and that such a move would be ‘cost-neutral’ for the Treasury at year zero. Any future additional costs could come from lowering the annual £40,000 pension allowance or ending employers' national insurance (NIC) exemptions.

The researchers also call for a new 'Office for Financial Security among the Self-Employed' to safeguard the prosperity of this growing demographic. Barely one in five self-employed currently pay into a pension, while 45% have no pension at all, the report notes.

Other recommendations include treating accountancy software providers as a de facto ‘employer’, requiring them to enlist their self-employed clients onto a pension scheme.

The RSA also calls for ‘sidecar’ savings accounts, which blend a rainy day fund with a pension account, and so give savers greater access to their money in the event of emergencies, as well as Dutch-style collective defined contribution pensions, which would provide a guaranteed income to pensioners from the point they retire until they die.

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. ‘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.’

RSA report Venturing to Retire is here.

Report by Pat Sweet

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