Top 10% handed 40% of pension tax relief, warns RSA

By agency reporter
April 23, 2018

A new 30 per cent flat rate of pension relief would be progressive, cost-neutral and leave three-quarters of earners better off, a new report from the Royal Society of Arts think-tank finds.

 Venturing to Retire, in partnership with e-commerce marketplace Etsy, explores the UK's low rate of pension savings, finding:

  • 40 per cent of government spending on pension relief goes to the top 10 per cent of those claiming relief, who earn £70,000 a year or more. This is deeply disproportionate as they only make-up 24 per cent of pension contributions.
  • Basic rate payers, 75 per cent of those claiming any relief, pay more into pensions (51 per cent) but get only 32 per cent of pension tax relief.
  • But by contrast, higher rate payers get 53 per cent of relief, despite contributing only 41 per cent, while additional rate payers, make only eight per cent of contributions but get 15 per cent of relief.
  • In total, pensions relief costs HM Treasury £30.5 billion, of which £11.8 billion is spent on people earning more than £70,000.

This "deeply regressive" system gives basic rate payers fewer incentives to save, the report continues, and especially hurts the growing ranks of the self-employed, who earn less than the average employee and have no employer topping-up their pension.

Contrary to belief, few of the self-employed can rely on a partner's pension or selling a business or property to fund retirement, the study adds, while non-pension products, such as the Lifetime ISA, fail to offer the financial benefits of a traditional pension.

Reforming pension relief is therefore the only viable solution to under-saving among the self-employed, the researchers conclude, calling for a 30 per cent flat rate to boost the pension pots and individual saving incentives for basic rate taxpayers.

A flat rate would match relief to contribution: for every £1 savers wish to add to a pension, they would only need to contribute 70p – regardless of how much they earn or which tax bracket they fall into. So if the top 10 per cent pay in 24 per cent they get 24 per cent of the money spent on relief, rather than the current 40 per cent.

The RSA's analysis suggests three quarters of people would be better-off and that such a move would be "cost-neutral" – even saving slightly – for HM Treasury at year zero. Any future additional costs could come from lowering the annual £40,000 pension allowance or ending employers' NIC exemptions.

Winners and losers: how would a 30 per cent flat rate affect me?

  • The RSA proposes replacing basic (20 per cent), higher (40 per cent) and additional (45 per cent) pension relief with a single flat rate of 30 per cent in order to encourage basic rate payers to save.
  • So a worker on £15,600 who contributes five per cent to a personal pension (£780) would see her tax relief climb from £195 a year to £335, a 70 per cent increase.
  • Likewise, a worker on £30,000 who contributes five per cent of her salary to a personal pension (£1500) would see her tax relief climb from £375 a year to £645.
  • However, a worker on £60,000 who contributes five per cent of her salary to a personal pension (£3000) would see her tax relief fall from £2,010 to £1,290.

The researchers also call for a new 'Office for Financial Security among the Self-Employed' to safeguard the prosperity of this growing demographic, as well as:

  • treating accountancy software providers as a de facto 'employer', requiring them to enlist their self-employed clients onto a pension scheme
  • introducing "sidecar" savings accounts, which blend a rainy day fund with a pension account, and so give savers greater access to their money in the event of emergencies
  • fully introducing Dutch-style Collective Defined Contribution pensions, which would provide a guaranteed income to pensioners from the point they retire until they die.

Benedict Dellot, report author and Associate Director for Economics at the RSA, said, "Our research debunks several mythical solutions to the pensions crisis, including that the self-employed are saving instead into ISAs – they aren't, can rely on their partners' pensions –they can't, or have found a better savings vehicle in the form of property –they haven't.

"In short, the self-employed cannot save money they do not have. Nor can they rely on employers' contributions when they do not have an employer. Cajoling them to bank more money for their retirement is likely to fall on deaf ears.

"Overhauling tax relief is the only way to move the needle on saving rates and help the growing ranks of the self-employed avoid destitution in older age."

Barely one in five self-employed currently pay into a pension, while 45 per cent have no pension at all, the report notes.

The number of self-employed has grown by 40 per cent since 2000, and today they make up one in six workers. Once a prosperous group, many lower-paid workers such as hairdressers, delivery drivers and cleaners are now self-employed rather than employees.

The study follows RSA chief executive Matthew Taylor's Review of Modern Employment for the Prime Minister, which suggested that "gig economy" workers could qualify for pension auto-enrolment.

The government is currently consulting on this and other recommendations.

Matthew Taylor, chief executive of the RSA and author of the Taylor Review, added, "Given they now make up one in six workers, it is time to stop assuming the self-employed are also self-sufficient.

"As my Review on Modern Employment for the Prime Minister made clear, the rise in self-employment isn't 'good' or 'bad' in itself, provided the state acts to address the downsides.

"The Treasury should deliver on the Prime Minister's vow to prioritise ordinary working families, rather than the wealthy, when it comes to tax, and act for the real Middle England - hairdressers and taxi drivers on low and middle incomes, not top earners like me on £70k plus who the system currently subsidises.

"Overhauling an outdated and indefensibly regressive system, alongside introducing Collective Defined Contribution pensions, would showcase the government's serious commitment to social reform."

Angela Steen, Director of Government Relations at Etsy, said, "As the economy continues to shift in ways that make independent work more commonplace and desirable, Etsy sellers' experiences should inform and shape our understanding of the future of work.

"For 36 per cent of Etsy sellers in the UK, their creative business (both on and off Etsy) is their sole occupation, and the majority are part of the independent workforce either through their creative business, other self-employment, part-time or temporary work. Only 21 per cent of Etsy sellers have traditional full time jobs.

"This research unlocks key insights behind the savings gap for the self-employed, and offers solutions that can reshape retirement for creative entrepreneurs entirely. We're hopeful that policy makers will explore these recommendations as new opportunities to help microbusinesses build economic security for the long term."

* The Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) https://www.thersa.org/

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