Budget 2021: PLSA urges govt to deal with net pay anomaly and AE but leave tax relief alone
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The Pensions and Lifetime Savings Association has submitted its preferences on pensions reform and taxation to government, in advance of the 2021 Budget and Spending Review due on 27 October, coming out against fundamental reform of tax relief and in favour of increasing AE contributions.
'Not the time' for tax relief changes
First, it argues that now is not the right time to reform tax relief. "Many people are not saving enough for their retirement and tax relief acts as an important incentive to help people save," it argues.
It adds that if the government does decide to do so, it should ensure that any system:
- promotes adequacy;
- encourages the right behaviours;
- is fair to employees and the self-employed;
- is simple to adopt and administer, avoiding unreasonable costs; and
- is enduring and sustainable.
"Our overall assessment continues to suggest that no single reform or the current system is perfect. Most reform options leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes," the PLSA notes.
Central solution to remove net pay anomaly
The PLSA does however lobby for reforming tax relief to eliminate the net pay anomaly, which currently is the reason why about 1.5m lower earners miss out on relief.
The PLSA says to resolve the anomaly, a central solution, called the P800 process, operated by HM Revenue & Customs would deliver the "comprehensive, efficient, cost-effective solution we believe necessary and require no further engagement from savers".
'Keep an open dialogue' with industry on investments
As a third point, the association lists responsible investment, referring to the Productive Finance Group it has been a part of. The PLSA said: "We would like the government to keep an open dialogue with the pensions industry as to how schemes can best support the Government’s agenda on this issue."
The Productive Finance Group recently published a report with recommendations to increase illiquid investments by defined contribution schemes. Commenting on the report, the PLSA's chair Richard Butcher had said illiquid investment could be beneficial but added that investment decisions remain a matter for trustees, who have a fiduciary duty to their members before being able to consider any government agenda.
Storing up problems: AE adequacy
As a last point in its submission, the PLSA is urging the government to increase minimum auto-enrolment contributions to 12% from the current 8% and move to a 50/50 split between employers and employees. Under the current system, employees contribute 5% and employers 3%.
Changing auto-enrolment in this way, it says, "will ensure that pension saving remains affordable for both savers and employers".
As a first step, it says the government should now introduce legislation to follow through on the recommendations in the 2017 Auto-Enrolment Review, by lowering the age threshold from 21 to 18 and removing the lower earnings limit of currently £6,240 a year, so that people start saving from the first pound of earning.
