‘Few winners and many losers’ How Rishi Sunak changing pension tax relief could hit you

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More than 20% of people have lost a pension pot says expert

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The much discussed plans would remove the higher rate of relief and simplify the system, introducing a flat rate of relief at 25 percent.

The analysis, from Pensions and Lifetime Savings Association (PLSA), said: “Removal of the higher rate of pensions tax relief would be of no benefit to the majority of taxpayers who pay Basic Rate income tax and even the introduction of a new, more generous, single rate of 25 percent would only result in a modest uplift in pension income for some savers.”

Nigel Peaple, director of policy and advocacy at PLSA, said: “Our analysis shows that such reforms create few winners and many losers.”

He said that while it might seem reasonable to reduce tax relief for highest earners, “it should be remembered that many more than 13 percent of taxpayers will earn this amount at some time, and many only for a short number of years towards the end of their careers – when pension saving is often at its highest”.

They looked at what the effects of a flat rate at 20, 25 and 30 percent would be.

For a flat rate at 20 percent, someone on median earnings (£29,000 as one approaches retirement) they would see “no change” to their contributions or tax bill, according to the report.

For a flat rate at 20 percent, someone on median earnings (£29,000 as one approaches retirement) they would see “no change” to their contributions or tax bill, according to the report.

For the same person if a 25 percent flat rate was brought in, they would see an increase in retirement income of around £200 a year if they saved eight percent of their salary in a pension.

Despite slightly higher retirement income, “the application of tax relief at 25 percent would result in only a very small increase in pension income”, the report said.

For this example individual, they would expect to have 52 percent of their pre-retirement income replaced by state and private pensions, which would increase to 53 percent under the plan; hardly a revolution.

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For higher earners, a “substantial tax bill” would have to be faced under the plans, the report said.

Under a 20 percent flat rate, someone in the top 10 percent of earners (£64,000 as they approach retirement) would pay a staggering £34,500-£205,700 extra tax over their working life.

Not only would they have to countenance higher taxes, they would receive a lower retirement income at the end of it, somewhere between £900 and £7,500 lower per year.

The plans are part of a wider Government movement to raise revenue to pay for the costs of the pandemic, a new social care system and the massive healthcare backlog.

When it comes to the extra revenues a flat pension relief rate would raise, a previous PLSA report said the adoption of a 25 percent rate might raise as much £4.8billion a year for the Treasury.

A 20 percent rate would raise up to £10billion a year, but would result in “lower pensions for many”.

Mr Peaple said: “The PLSA estimates that the removal of higher rate tax relief on pension contributions could result in around three to four million taxpayers each paying an average of £2,000 more tax each year; money that would otherwise have gone into their pensions.

“On balance, the PLSA believes the current system of pension taxation should be maintained to encourage an adequate level of saving for all. “

The new modelling has also found, grimly, that a comfortable retirement is out of reach for all but the most fastidious savers, or those on the highest incomes.

Under current minimum auto-enrolment savings rate of eight percent, people on a median salary will likely achieve something between a ‘minimum’ and ‘moderate’ retirement income.

This means they will be able to get by, but will miss out on the luxuries many years for in retirement such as foreign travel and fancy restaurant.

The national debt has ballooned over the last 18 months to over £300billion.

To add some perspective, this is double that faced after the last global financial crash which led to a decade of austerity.

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