The document discusses potential reforms to the UK's tax system for private pensions. It considers options like providing a flat tax credit for pension contributions rather than tax relief that varies by income tax bracket. Another idea is incentivizing employers to match employee pension contributions through tax credits. However, reforms face challenges like losing tax revenue and being politically unpopular. The optimal approach may be to increase the lump sum tax-free withdrawal allowance to encourage broader pension savings.

1. New tax solutions to incentivise
private pensions

2. • Current system redeems tax relief at the individual’s margin rate of tax.
• Higher earners can get 40/50% tax relief on contributions up to £50,000; lower
earners only get 20% relief.
• Low earners, the group likely to insufficiently save, could be incentivised by a tax
relief credit which brings the same relief as for higher earners e.g. A 20% tax relief
credit.
• High earners are not benefitted, but are likely to have sufficient pension plans
anyway.
• The treasury would potentially face a costly rebate if adopted, depending on the
reactions of individuals.

3. • The current system is centred around tax relief corresponding to individual’s
marginal tax rates.
• The system appears most beneficial to the highest earners (the marginal rebate
is higher), despite these being most likely to make pension provision.
• The system could be modified so tax relief level is unrelated to individual’s
marginal tax rate. This means all have the same reward to pension savings.
• Research could determine a tax receipt neutral solution, balancing increased
rebates to lower earners with decreased rebates to higher earners.
• The scheme potentially endangers defined benefit schemes reliant on the 40%
rebate for revenue, and is politically unpopular with ‘Middle England’.

4. • Tax relief is directly linked to the level of marginal tax rates.
• The measure would also be a boost to the treasury, as long as the optimal point
of the Laffer Curve is not surpassed.
• A Swedish study has shown a tax-price elasticity of -0.51; If marginal rates rise
1%, an individual will increase pension contributions by 0.51%.
• An increase in tax rates means less income for individuals. Those on low incomes
would be forced to think even more short-term, with disposable income for
savings depleted.
• The move would be largely unpopular with the voting population, and is unlikely
to increase pension contributions in the target population.

5. • A significant incentive for individuals to develop a pension provision is for their
employers to offer a partly or fully matched contribution themselves.
• Evidence from stakeholder pensions demonstrated that an employer
contribution would increase employee contributions by up to 80%.
• One potential strategy is a tax credit to offset tax costs to the business. This
could relate to NICs or corporation tax.
• The scheme relies on the behaviour of individuals to respond to employers. It is
also likely to punish employers who already contribute and have large existing
employee members.
• If the scheme is successful, the tax revenue loss to the government may be
significant.

6. • Most investment income in pension schemes are tax-free.
• The exception are dividend returns. Prior to 1997 they were tax free, as theory
believed firms performance was taxed via corporation tax, so dividends were
effectively post-tax.
• The move raised £5bn for the treasury, but is believed to have compromised
pension schemes far more significantly.
• Pension funds suffered large finance shortfalls, forcing a switch to less attractive
pension schemes, and deterring private saving.
• The re-introduction is unlikely due to the cost at a time when the government
pursues an austerity programme.

7. Key allowances:-
1) Lump Sum Allowance – 25% pension can be withdrawn tax-free on retirement.
2) Annual Allowance – Individual allowed tax relief on first £50,000 of contributions.
3) Lifetime Allowance – Individual allowed tax relief up to £1.8m pension
contributions.
• Changing these measures could encourage significant additional absolute levels of
savings.
• The second and third options are exclusively related to the wealthiest. These will
have significant pension plans already.
• A change in the first option may encourage savings amongst all levels of wealth.
• It would need a significant pension increase, which would be costly to the treasury.