Press release: Consistency in policy will restore young taxpayers’ confidence in the pensions system, says tax body

21 October, 2015

The Association of Tax Technicians (ATT) has advised the Government that consistency in pension policy is the best way to motivate people to save more, particularly basic rate taxpayers in their twenties and thirties who are not saving enough for their retirement.

The tax body has also dismissed the idea that replacing tax relief on pension contributions with tax exemption on pension incomecould be a workable solution.

Paul Hill, Chairman of the ATT’s Technical Steering Group, said:

“Greater engagement is not always achieved by making something simpler. We believe that in the case of the pensions system it is much more important to have predictability and consistency of rules. That has not been the case under successive governments. The constant shifting of the rules has reduced public confidence in the system and goes some way to explaining why individuals might not be motivated to save towards a pension.

“An agreement by all parties to work towards a sustainable pensions system that will remain unchanged for a significant period of time could help greatly to incentivise people to become more engaged with pensions.”

In its ‘green’ consultation paper, the Government asked whether a change to a Tax-Exempt-Exempt system2 might work better than the current system. This would see taxpayers making pension contributions out of taxed income with the eventual pension benefits being taken tax free in retirement, the opposite way to how the system currently works.

Paul Hill said: “We do not think that a change to a Tax-Exempt –Exempt system would be sustainable. Initially, it might help to boost the Exchequer with tax on contributions but in the long-term it would see a large section of the population not paying any tax into the tax system as pensioners draw tax-free pensions.

“More importantly, we do not see how taxing contributions up front would encourage people to save more, especially since many young people often have other commitments on their income such as student loans repayments, getting on to the housing market or starting a family.”

Notes for editors

  1. The Tax-Exempt-Exempt description is shorthand for indicating that there would be no relief for pension contributions at the time of payment (so the contributions would have been taxed), the fund would then grow tax-free (so Exempt) before finally being distributed tax-free (so Exempt). By contrast the current (and longstanding system) is Exempt-Exempt-Tax.