The Association of British Insurers (ABI) has called for changes to tax relief on pensions to make the system more equal.
The move comes in the wake a report from the Pensions Policy Institute (PPI) which demonstrated that higher earners gain most from the current system – particularly men.
Tax relief tops up pension savings, alongside the saver’s own contributions and those of their employers. For higher earners, tax relief is paid on pension contributions at the highest rate of income tax they pay. Those on basic-rate taxpayers receive 20% pension tax relief, higher-rate taxpayers 40%, while additional-rate taxpayers can claim 45% pension tax relief.
The PPI report, commissioned by The ABI, found that people on higher incomes further benefit because they are also likely to have more funds available to put into their pension than lower earners.
The report found that people paying basic rate tax make up 83.4% of total taxpayers but only receive 26% of the total amount of pensions tax relief related to defined contribution (DC) pension contributions.
A single “flat rate” could help distribute tax relief more evenly, making it fairer to all earners and encouraging lower earners to save more for retirement.
Yvonne Braun, director of long-term savings and protection at the ABI, says: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”
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