Find out why the Treasury response to AJ Bell’s pensions petition matters

MPs from the Petitions Committee have told the Treasury its response to an AJ Bell petition was not up to scratch after the Government refused to commit to current policies on pension tax-free cash or tax relief.

The Treasury’s response followed a petition raised by AJ Bell, which called for a commitment to pension tax stability. This primarily focused on the Government giving a commitment not to change tax-free cash and tax relief, which are always rumoured to be changed ahead of Budgets.

Constant speculation about potential changes to retirement saving incentives undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. We think 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.

AJ Bell’s Pension 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 where 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.

How the treasury responded

Following the petition, the Treasury pointed to the Pensions Commission, which was revived earlier this year to undertake a review of the UK pensions system, but this did nothing to ease the nerves of many hard-working pension savers ahead of the Budget.

In its original response, the government acknowledged the importance of the pension tax pact between savers and the taxman, under which Brits can 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 a 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.

However, the government focuses on the gross cost of pension relief, 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 play a pivotal role in the future of the retirement savings system. The government is right to argue that 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.

You can still find the link for those who would like to sign the petition.