Analysis by the PLSA suggests that amendments to pension tax relief would benefit few

30 July 2021

The Pensions and Lifetime Savings Association (PLSA) has carried out research which suggests that changes to pensions tax relief would not significantly improve the retirement income of lower and median earners and would lower the pension income for many others who pay higher rate income tax.

There have been suggestions that the higher rate of pensions rax relief will be removed, to make way for a new single rate of relief at 25%. The media has speculated that this will generate more revenue to help pay for the enormous cost of the pandemic or to fund changes to the social care system. 

The PLSA investigates how workers with varying incomes, in different types of workplace pension scheme, could potentially be impacted by four reform options, in the Pension Tax Reform: Implications for Savers report. The document explores impacts on private pension income, total retirement income, retirement replacement rates, and the PLSA’s Retirement Living Standards. 

The options for reform are as follows:

•    Flat rate relief set at 20%
•    Flat rate relief set at 25%
•    Flat rate relief set at 30%
•    TEE – this is where pension contributions are taxed at a person’s marginal rate of income tax, but investment returns and pension income are exempt

The report suggests that the abolition of the higher rate of pensions tax relief would not benefit most taxpayers who pay basic rate income tax. The implementation of a higher single rate of 25% would, in fact, only lead to a slight increase in pension income for a small number of savers. 

The report discusses the impacts of different tax reforms on the pay of median earners and that of also on that of higher rate taxpayers. Read it in full here.

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