The whole pensions system has become so complex and unwieldy that it needs a radical overhaul and sooner rather an later.
We expected to get “pensions simplification” way back in 2006 when the current (albeit constantly tinkered with since) pensions rules were put in place.
The Government at that time quickly dropped the word “simplification” from their description of what was taking place and replaced it with “modernisation”.
End result, the whole thing is now so vastly complex that the typical consumer has a real struggle to understand what is what.
This week we have seen a call for further change to the tax relief available on pension contributions.
The Pensions Policy Institute (yes so complex and unwieldy that we need an Institute to pontificate on it!) claims that tax relief is skewed in favour of higher rate tax payers and provides little incentive to basic rate tax payers to save for retirement.
Well no real surprise there then.
Higher rate income tax payers get higher income tax relief and their tax free cash lump sums tend also to be much higher than those for basic rate income tax payers.
The Institute calls for a flat rate of tax relief of 30% claiming that this will be broadly neutral for higher rate income tax payers and more of an incentive for basic rate income tax payers.
This may well be true but perhaps such a change could be delivered with proper simplification of the other rules that go along with tax relief.
Perhaps we can be rid of the silly situation where there is both an input limit and a maximum pension fund value beyond which even more penal rates of tax apply. If there is a flat rate of income tax relief we surely don’t need these other limitations?
And whilst the Government is at it perhaps they could at long-last abolish the stealth tax that Gordon Brown introduced back in 1997 when he abolished the ability of pension funds to recover the tax charge on UK equity dividends.
It was that stealth tax that sped us along the road to where we are today; the UK used to have the best private pension system in Western Europe, it is now now arguably one of the worst.
But don’t hold your breath and expect any form of substantive change for the better.
Politicians enjoy kicking the political football that is pensions around far too much for them to change now.
