- AJ Bell’s petition for a Pension Tax Lock, asking the government to commit not to change the rules on pension tax-free cash or tax relief, reached over 20,000 signatures in a matter of weeks
- Petitions Committee tells government to provide a ‘revised response’ after it dodges Pension Tax Lock question
- The committee, a group of MPs who oversee the petitions system, did not feel the government’s response addressed the request of the petition directly
- Treasury had said it would not comment ahead of the Budget and pointed to the revived Pensions Commission, which will ‘make recommendations to the government on the broader questions of adequacy, fairness, and sustainability’
- Fundamentally changing the terms under which people can access their own money threatens to undermine people’s confidence in long-term saving
Tom Selby, director of public policy at AJ Bell, comments:
“Less than two weeks after the Treasury opted to side-step the issue of a Pension Tax Lock – a commitment not to change the rules on pension tax-free cash or tax relief for at least the rest of this Parliament – in its response to AJ Bell’s recent petition, a group of MPs on the Petitions Committee have told the Treasury their response isn’t up to scratch. Unsurprisingly, the Committee did not believe that the government was direct enough in its response to the request for certainty on pension taxation.
“While the Treasury prevaricated and pointed to the Pensions Commission, which was revived earlier this year to undertake a wholesale review of the UK pensions system, this did nothing to ease the nerves of many hard-working pension savers ahead of another Budget tipped for tax rises. This rebuke also comes just a day after Rachel Reeves laid the groundwork for a manifesto-breaking hike in income tax during an unexpected speech in Downing Street amid rampant speculation around her plans for the Budget in three weeks’ time.
“Given it previously indicated that the Commission would take the lead on the future of the UK’s pension system, it shouldn’t be too much to ask for the chancellor to at least promise there will be no political tinkering before the Commission reports. The purpose of the Commission must surely be to avoid short-sighted political decision-making around a key pillar of the tax system, upon which people hope to build a retirement plan over decades of saving and investing. So it is entirely reasonable to ask the chancellor for a simple promise that she won’t meddle in pensions and will leave that work to the Commission.
“That certainty, particularly in week mired by a distinct lack of it, would at a minimum allow many people to plan for the long term and feel more confident that government won’t move the goalposts on pensions taxation. But it would also likely give the government a much-needed positive headline ahead of the Budget, as well as neatly complimenting Reeves’ stated aim of boosting pension adequacy and encouraging investing in the UK stock market over the long term.”
Government response
“In its original response the government at least acknowledged the importance of the pension tax pact between savers and the taxman, under which Brits are able to defer income tax until retirement and are incentivised by the added perk of a 25% tax-free entitlement. This deal is struck decades ahead of retirement when people start working and saving in a pension. Changing the rules of the game before people retire would be an absolute betrayal of those still working hard to build up their pension, who deserve the right to retire on the same terms as the generation before them.
“Focusing on the gross cost of pension tax relief, as the government does in its response to our petition, is also misleading, failing to take into account that pensioners pay tax on their income in retirement. This tax deferral system is the bedrock of retirement provision in the UK and means people, with the help of their employer, can build savings for later life, forming an important part of the consumer economy, reducing dependence on the state in retirement and helping smooth tax revenues in an ageing population. None of that can be captured by looking at the issue only through the lens of the ‘cost’ of pension tax relief for the Treasury.”
The role of the Pensions Commission
“Looking ahead, the Pensions Commission will clearly play a pivotal role in the future of the retirement savings system. The government is right to argue there are still challenges with under-saving across the UK, particularly among certain groups such as the self-employed, and it is sensible to look at those challenges holistically through an arms-length commission.
“Nowhere in the terms of reference has government specifically indicated that the Commission should review pension tax incentives, however, and the Commission’s focus should instead be on pension adequacy – ensuring everyone has at least enough to fund a decent retirement. That is best achieved by looking at boosting participation among groups with fewer savings. Ripping up the pensions tax rulebook will only damage confidence, doing nothing to help encourage people to save for the future.
“Fundamentally changing the terms under which people can access their own money, which they set aside for retirement in good faith, threatens to undermine people’s confidence in long-term saving and damage public faith that governments can be trusted to keep their end of the bargain when people sacrifice income today to provide for themselves in the future.”
Background
Government response (22 October):
This response can also be found on the petition page:
The Government is committed to ensuring pensioners have security in retirement and has launched a Pensions Commission to look at what is required to ensure the system is strong, fair and sustainable.
The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw on, throughout retirement. The Government is committed to supporting savers at all stages of life. That is why, for the majority of savers, pension contributions made from income during working life are tax-free. This is known as 'pensions tax relief'. This relief is available at an individual's marginal rate. For example, contributions from a basic rate (20 per cent) taxpayer who contributes to a registered pension scheme in 2025/26 receives tax relief at 20 per cent. This makes pensions tax relief one of the most expensive reliefs in the personal tax system, costing £78 billion in 2023/24.
Investment growth of assets in a pension scheme is also not subject to tax. From age 55 (or when scheme rules allow a pension to be taken), up to 25 per cent of the pension can be taken tax-free (capped for most at a maximum of £268,275), depending on scheme rules. Pension income received (for example as a regular annuity payment or as income drawn down from a pension) is subject to income tax at an individual's marginal rate, to reflect the fact that pensions in payment are a form of deferred income and have not been previously taxed.
With regard to the proposed ‘pension tax lock’, the Government does not comment on proposed tax changes or tax related speculation ahead of Budgets.
The Government recognises the importance of promoting confidence in pension saving and is committed to ensuring future generations of pensioners have security in retirement. This is why the government announced a landmark two-phased review of the pensions system days after coming into office.
The first phase, the Pensions Investment Review, focused on reforming the pensions landscape to boost savers’ pension pots. These reforms will be delivered through the Pension Schemes Bill. The Pensions Commission will build on these foundations and make recommendations to the government on the broader questions of adequacy, fairness, and sustainability to guide the long-term future of our pensions system. The Pensions Commission will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce.
More information on the Pensions Commission, including its Terms of Reference, is available here: https://www.gov.uk/government/publications/pensions-commission-terms-of-reference
HM Treasury
Petitions Committee (5 November):
The Petitions Committee (the group of MPs who oversee the petitions system) has considered the Government’s response to this petition. They felt the response did not respond directly to the request of the petition. They have therefore asked the Government to provide a revised response.
When the Committee receives a revised response from the Government, we will publish this and share it with you.
Petition
The petition, registered on 1 October, can be found here.
Anyone can start a petition as long as they are a British citizen or UK resident. If a petition receives 10,000 signatures the government must respond. If it reaches 100,000 signatures it will be considered for debate in parliament.
Petition text:
Introduce a Pension Tax Lock to help protect retirement savings and incentives
The chancellor should introduce a Pension Tax Lock: a commitment not to reduce the amount people can withdraw from their pension tax-free or the amount of tax relief given on pension contributions. We believe this would help ensure retirement savings are protected and people can save with confidence.
We believe this simple commitment could put an end to the speculation seen ahead of every Budget – speculation which we think erodes confidence in long-term saving and can all-too-often lead to people making poor, sometimes irreversible, financial decisions.
We think this would come at zero cost to the Exchequer and would allow people to save for retirement with more confidence. We feel it could support the government’s twin aims of delivering pensions adequacy and boosting economic growth.
Pension Tax Lock
AJ Bell has consistently campaigned for government to commit to pension tax stability, with a focus on key tax incentives – tax-free cash (pension commencement lump sum) and tax relief.
Constant speculation about potential changes to retirement saving incentives, particularly tax-free cash, undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. This is an unacceptable position given pensions form the cornerstone of long-term financial planning and personal financial responsibility.
Furthermore, it runs counter to wider government efforts to boost pensions adequacy and drive greater levels of investment, including in the UK economy.
The Tax Lock proposal calls for a government commitment to the two core tax incentives in-built in the pension system:
- Tax relief: Pensions operate on the basis of a tax deferral system whereby individuals are expected to pay tax in retirement but receive tax relief on contributions at their marginal rate.
- Tax-free cash: Individuals are entitled to take 25% of their pension tax-free, normally referred to as tax-free cash or a pension commencement lump sum. At the very least this entitlement should not be reduced from its current level of £268,275.
