Pension tax perks widen inequalities, says think tank
THE current system of pensions tax relief widens inequalities between the sexes and between old and young and needs a radical overhaul, an influential industry body has said.
The Association of British Insurers called for a major shake-up in pensions tax relief after it was found that lower earners and young workers were missing out on vital tax relief even though more were saving for a pension.
Anyone who pays into a workplace pension receives tax relief, meaning contributions are effectively topped up by the Government. However, relief is granted at the saver’s “marginal” or highest rate, so those who earn more receive more from the Treasury.
Research by the Pensions Policy Institute think tank found that workers who earned less than £50,000 made up 83 per cent of all taxpayers but received only a quarter of the pensions tax relief paid in relation to “defined contribution” pensions, by far the most common type in the private sector.
The system favours higher earners, it concluded, as the proportion of people who earn less than £30,000 but qualify for tax relief has increased from 52 per cent to 62 per cent thanks to automatic enrolment. However, only 24 per cent of tax relief goes to them.
Men receive the vast majority of pension savers’ tax perks: 71 per cent of all pensions tax relief is granted to them as they pay 69 per cent of the contributions.
The tax system also benefits older people, with 42 per cent of those who contribute to a defined contribution pension aged under 40 but they receive only 27 per cent of the available tax relief. People in their 40s and 50s typically receive two and a half times as much tax relief.