According to the Organisation for Economic Co-operation and Development (OECD), pensions tax relief in the UK would be fairer if it were changed to a flat rate or completely overhauled.
The organisation’s report entitled OECD Pensions Outlook 2018 suggests that a single, 33 per cent rate of tax relief on contributions or an ISA-style TEE tax regime with a 50 per cent government matching contribution would be fairer across all income groups than the current EET tax regime.
The EET (Exempt-Exempt-Taxed) system means that when people pay into a pension scheme, the contribution is exempt from tax, as are investment returns but the proceeds of pension savings are taxable. In contrast, in a TEE (Taxed-Exempt-Exempt) system, contributions to a scheme are taxable but investment returns are exempt from tax and the proceeds are not taxed in retirement.
According to the OECD, this is unfair, as there is a “wide gap” in the treatment of savers. This is because non-taxpayers get no tax advantage when they save into private pension schemes, whereas those on the additional rate of income tax 45 per cent of their pre-tax contributions in taxes.
As a spokeswoman for the OECD pointed out, implementing a single tax relief rate would increase the tax advantage for lower and middle-income earners compared to the current system and would reduce the tax advantage for high-income earners.
The OECD’s suggestion is supported by the recent conclusion of a separate report from the Royal Society of Arts (RSA), which said that 40 per cent of government spending on pension relief goes to the top 10 per cent of people claiming it, who earn more than £70,000 a year.
Steve Horton, Financial Planning Partner at Milsted Langdon, said: “The OECD report suggests that significant savings could be made with amendments to pension’s tax relief.
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