Looks at the annual allowance and lifetime allowance - which limit the amount that can be saved tax-free in a pension - and the reductions in those allowance since 2010Jump to full report >>
Pension tax relief works on the principle that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out. Pension contributions made by individual employees are usually paid out of pre-tax salary, so tax relief is received at the individual’s marginal tax rate. The main limits that apply are the lifetime allowance (LTA) and annual allowance (AA). At introduction in 2006, the AA was set at £215,000 and the LTA at £1.5 million (Finance Act 2004, s218 and 228). Both were set to increase in stages, with the LTA reaching £1.8m and the AA £255,000 by 2010 (Budget 2004, para 5.45). Since 2010, both allowances have been reduced:
Reductions since 2010 have reduced costs to the Exchequer and the share of pensions tax relief going to additional rate taxpayers. (Cm 9102, July 2015, para 1.5 and 2.6.)
In 2015, the Government consulted on reforming pension tax relief, with the aim of strengthening the incentive to save as well as offering clear, simple and transparent incentives (Cm 5901, July 2015). However, in Budget 2016, the Chancellor did not announce any fundamental change to the tax treatment of pension on the grounds that there was ‘no consensus’ (HC Deb 16 March 2016 c966). In July 2018, the Treasury Select Committee recommended that the Government return to the question of whether there should be fundamental reform of pension tax relief. In the mean-time, it thought the system could be improve through incremental reform and that the Government should give “serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution” (HC 565, July 2018). In its response on 12 October, the Government said that “no consensus for either incremental or more radical reform of pension tax relief has emerged since the consultation in 2015.”
The debate on wider reforms and information on the cost and distribution of pension tax relief is in Library Briefing Paper CBP 7505 Reform of pension tax relief (October 2018).
The money purchase AA (now £4,000) which applies after an individual has accessed their pension savings flexibly is discussed in section 4.7 of Library Briefing Paper CBP-6891 Pension flexibilities: the ‘freedom and choice’ reforms (September 2018).