UK should apply brakes on further tax reform, OMW says

Old Mutual Wealth is calling on the UK government to halt any further plans for pension reform despite a recent survey by the life insurer suggesting that changes to tax relief would not discourage retirement saving.

UK should apply brakes on further tax reform, OMW says

Contrary to previous warnings, OMW’s latest poll of 219 UK financial advisers found that nearly half (42%) of advisers said introducing a flat rate tax for all pension contributions - as initially proposed by the then UK chancellor George Osborne earlier this year - would not discourage higher and additional rate taxpayers from making pension contributions.

However, around a fifth (21%) of advisers said a 25% flat-rate would be enough deter clients from saving, while 17% of advisers said client pension contributions would drop-off at 20%.

Just 5% of respondents said client would be put off saving extra if a 33% rate was introduced – making it the most “palatable” option, said OMW.

“Advisers have indicated that while savers may be able to tolerate a 33% flat-rate, representing a buy-two-get-one-free deal, more substantial cut-backs could be very damaging,” said Jon Greer, an expert on pension policy for OMW.

“I would urge the government to consider re-thinking the way it makes long-term savings policy decisions, keeping the process at arm’s-length from the DWP and Treasury and with a focus on ensuring savings legislation retains a long-term horizon and is not unduly influenced by party politics,” he added.

New UK government

The warning comes in light of Britain appointing Theresa May as the country's new prime minister, announced in the wake of the EU referendum that saw the UK electorate vote in favour of leaving the 28-member state union.

The subsequent cabinet reshuffle lead to Philip Hammond being named as the new chancellor of the exchequer, raising concerns over the future direction of pension policy.

With his predecessor, George Osborne, the architect of pension freedoms, it remains unclear whether Hammond will adopt the same appetite for reform.

Meanwhile UK pensions minister Ros Altmann stepped down after calling on the government to introduce a flat rate for pension tax relief, arguing that it favours the wealthy while discriminating against Britain’s lowest earners.

The government has yet to name her direct replacement as pensions minister, stoking fears that pensions may be on the back-burner while the UK negotiates its exit from the EU.

Earlier this year, in the run up to the chancellor’s annual budget, Osborne abandoned plans to introduced a flat rate amid mounting pressure from members of his own party.

“Our present ineffective and complex incentive structure for pension saving costs over £40bn ($53bn, €48bn) a year. It favours the highest earners disproportionately, while leaving lower earners seriously disadvantaged,” said Altmann.

“We need a radical overhaul of incentives, which can offer more generous help than basic rate tax relief, but as a straightforward government pension contribution for all, and would end the discrimination against Britain’s lowest earners who are forced to pay at least 20% more for their pension than higher paid workers," she added.

“Advisers have indicated that while savers may be able to tolerate a 33% flat-rate, representing a buy-two-get-one-free deal, more substantial cut-backs could be very damaging.”