• A Government bulletin on the costs associated with ‘structural reliefs’ has put the bill for pension tax relief at £21.6 billion in 2019/20 (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/930743/Oct20_tax_reliefs_bulletin_v7_-_Accessible_Final.pdf)
• In addition, the cost of National Insurance (NI) relief on employer pension contributions was estimated at £18.7 billion
• Taken together, the net cost of incentivising retirement saving via pension tax and NI relief in 2019/20 was £40.3 billion
• ISA tax relief, meanwhile, cost the Treasury just under £3.5 billion last year
Tom Selby, senior analyst at AJ Bell, comments: “There are three certainties in life – death, taxes, and rumours of radical reform to pension tax relief ahead of the Budget.
“Given we are in the middle of a pandemic which has seen the Government forced to directly support employee pay - with borrowing balloon by hundreds of billions of pounds as a result - it is a racing certainty the next major fiscal event, whenever it arrives, will trigger more speculation about the future of pension tax relief.
“While the headline numbers associated with pension tax relief are always going to be big, it’s worth noting that costs have largely steadied in recent years even as automatic enrolment has been introduced.
“This has been, at least in part, because of cuts to the annual and lifetime allowances during that period, as well as the introduction of the horrifically complicated annual allowance taper. The cost of ISA tax incentives has also levelled off at around the £3.5 billion mark.
“It is important to remember when assessing these costs that the purpose of pension tax relief is to encourage people to save for retirement so they don’t risk falling back on the state.
“Given that individuals have to commit to not touch the money until their 55th birthday – which will be over three decades for younger savers – maintaining this incentive is crucial as we look to build a nation of savers.
“Clearly the immediate priority for the UK Government is dealing with the Coronavirus pandemic, but we should also not lose sight of one of the key long-term challenges facing Western society – low savings levels combined with rising life expectancy.
“If there is to be reform of pension tax relief at some point in the future, this needs to be conducted in a measured way with a focus on simplifying the rules and encouraging more people to save for retirement.”
