Actuaries have warned that a recent suggestion by the pensions minister to introduce a flat rate of 30% tax relief on pensions for everyone could complicate things, particularly for defined benefit schemes.
Steve Webb's proposals emerged in an interview with the Daily Mail, published yesterday. He said he wanted to see the benefits of pensions tax relief spread much more evenly across the workforce.
The Liberal Democrat minister argued that people who get it at 40% tax relief 'get shed loads', adding that: 'If you gave everybody 30% then that spreads it much more evenly. Clearly that is not government policy, it is not even Lib Dem policy yet - but I'm working on that.'
He questioned why there wasn't a simpler system saying that, if his idea actually become a policy, 'you probably don't need a lifetime allowance'.
Webb also revealed that the government was considering giving people an estimate on their life expectancy when they reach retirement age following the new flexibilities for pensioners announced in the March Budget.
But Malcolm McLean, a Barnett Waddingham consultant, told The Actuary that: '[Webb's idea] would complicate things a little because occupational schemes and defined benefit schemes in particular [operate in a system where] contributions are deducted from the person earnings before tax. And the tax allowance is simply taxed in the normal way, which is automatically simple to do.
'Whereas, if you had a standard rate of tax you'd have to change the system slightly... it could be done but you'd have to jump around with the figures a bit. You'd have to deduct the pension contributions from the gross earnings to arrive at the taxable earnings, then you'd have to increase those taxable earnings slightly to compensate the fact that you didn't want the people to get 40% relief and you only wanted them to get 30%.'
However he said that the proposed policy would likely get more people to join pension schemes.
Echoing McLean, actuaries Towers Watson said a single rate of tax relief for everyone would be 'tricky' and was a policy in the 'easier said than done' category.
It said if the government did introduce a flat 30% tax relief rate, it would possibly require higher-rate taxpayers to pay a 10% benefit-in-kind tax on money that their employers contribute to pensions for them.
'Unless it did this, 40% taxpayers would be able to get 40% relief indirectly, by giving up salary in return for higher employer pension contributions on which they would not have to pay tax,' stated the firm.
'Making employees pay tax on employer contributions would get tricky in relation to DB schemes - and therefore in relation to public sector employees who pay 40% tax.'
But others welcomed the proposal. Hargreaves Lansdown said Webb's idea was 'interesting' and had 'merit'.
'I think the trade-off of moving to a flat tax relief rate, which would be a loss for higher earners but offsetting that with the removal of lifetime allowance is potentially a viable proposition,' Tom McPhail, head of the pension research at the firm told The Acutary.
