The pensions tax regime is distorting the labour market, a new survey has suggested, as a fifth of employers say tax restrictions on pension accrual have caused some staff to retire early or work fewer hours, showing the issue affects employers beyond the public sector. 

 

The annual allowance, tapered annual allowance and lifetime allowance are ways the Treasury seeks to limit the amount of tax relief it pays on pension contributions. In 2019/20, HMRC expects net relief on registered pension schemes to be about £21.2bn, or 1% of GDP – this is the sum of relief on contributions paid plus the relief on investment income of funds, minus tax paid in retirement. 

 

The Office of Tax Simplification recently recommended to the government that it should “continue to review the annual allowance and lifetime allowances and how, in combination, they deliver against their policy objectives, taking account of the distortions (such as those affecting the National Health Service) they sometimes produce”. 

 

A new survey shows the ‘distortions’ go beyond the NHS. Of 308 employers, three-quarters want to see the pension tax regime simplified, as a fifth (21%) said that skilled staff are retiring earlier or working fewer hours because of it, according to the 2019 Pension Trends survey by the Association of Consulting Actuaries. 

 

The negative effect of pensions taxation on staffing levels in the NHS has been in the public eye for several months. The British Medical Association claims that 42% of GPs and 30% of consultants have reduced their hours due to pensions tax, while of those that haven’t, 37% planned to do so in the next 12 months; and nearly half of all respondents said they plan to retire early because of the tax. 

 

If patients need to wait for treatments because of how government has designed the pensions tax regime, this is disturbing. If the trend is also seen among employers and employees in other sectors, it confirms that the system is setting the wrong incentives and needs to be reformed.  Whether the government’s proposal to allow flexible accrual in the NHS scheme can be considered a solution is questionable, because any solution would, given these figures, need to apply to all pension savers. 

 

Employers in the private sector, it seems, are also feeling the impact that the loss of skilled employees has on them and are keen to ensure that any reforms are not restricted to the public sector; cynics might say that company directors are eager to see pensions tax allowances lifted for more personal reasons. Of the employers surveyed by the ACA, 69% said they want the tapered annual allowance to be scrapped entirely – even if this would mean reducing the general annual allowance. 

 

Losing staff is one problem, but the tax is also leading to senior employees opting out of the pension scheme. Nearly half (44%, up from 30% last year) of respondents said the tax regime has led higher earners to leave the firm’s pension scheme because of the tax regime, “disconnecting more and more senior decision-makers from personal interest in this key element of the employee package”, the ACA argues. 

 

There seems to be a widespread view that the current regime is flawed not just for higher earners; 67% of employers would view targeted help for lower earners positively, even if this means reducing relief for higher income groups.   

 

The survey findings “show grave unease” about the impact of the regime, and a clear desire for reform, the ACA has said. But it warns that any change must be “well considered” and agreed “with cross-party deliberations and openness on what the political aims are, and with input by experienced practitioners on its structure”. 

  

“There is widespread demand for reforms to simplify a tax regime that is now well past its sell-by date,” said the ACA’s chair, Jenny Condron. “It is clear that any reforms being considered by the Treasury must not be short-term tweaks for public sector employees only – reforms must be even handed and extend to resolving problems that impact on all wealth-generating sectors of our economy.