30 September 2015: UNISON Response to HM Treasury
Consultation, “Strengthening the incentive to save: a
consultation on pension tax relief”
About UNISON
UNISON is the UK's largest public service trade union with 1.25 million members, 1 million of
them women. Our members are people working in the public services and for private
contractors providing public services including the essential utilities. They include frontline
staff and managers working full or part-time in local authorities, the NHS, the police service,
colleges and schools, the electricity, gas and water industries, transport, non-departmental
public bodies and the voluntary sector. Whilst we have members at all pay levels across the
sectors, many of our members are part-time and low paid, working in traditionally low paid
sectors like care, catering, security and cleaning.
General Comments
UNISON believes the current system is simple and transparent but is becoming more
complex and less transparent as a result of:

the introduction of ‘pension freedoms’ in April and the stealth tax on 75% of the
pension pot for those encouraged to take their pension pots as cash.

Continuing reductions to the Annual Allowance and Lifetime Allowance that is
beginning to impinge on middle earners and many ill-health retirees.
The first question should be is the present system fair to all those trying to save to avoid
poverty and dependency in retirement. UNISON would potentially support a move to a
single level of upfront tax relief and consider such a move as beneficial as long as it was
properly thought through and did not reduce the overall level of tax relief. A flat rate of 33%
so that savers earn £1 in tax relief for every £2 saved seems a sensible solution to us.
The current situation where those who benefit the most from tax relief are the higher paid
while the lowest paid receive little or no tax relief because of the tax threshold is unfair.
Is the level of tax relief under control and at the right level?
The consultation paper specifies that the cost of pension tax relief is rising, but Chart 2 on
the same page seems to show the opposite with total reliefs reaching over £45 billion and
levelling off and dipping slightly in 2014 with gross income tax reliefs being level from 2010.
It is not clear why this is. It may have more to do with the restrictions on pay so
contributions remain constant and attract the same or less relief than it does with reducing
annual allowances.
Our view is that upfront pensions tax relief is a key component to allow most of those saving
for retirement to continue. It may be correct that some do not fully understand the tax
relief they are currently receiving, however from our experience the main reason that
workers give for not contributing to a pension scheme is cost.
It is a key point that can be made to workers who have currently opted out of pension
schemes arrangements. It is more to do with communicating what tax reliefs are available. It
is this that is more likely to incentivise people to save than removing or reducing tax reliefs.
Removing any part of the current relief would be likely to lead to significant opt-outs of
pension schemes and arrangements. Instead of tax relief being an incentive to save its
reduction or removal would be a strong disincentive to save.
The Local Government Authority have quoted figures in respect of the Local Government
Pension Scheme that show that the current system provides tax relief on contributions of
around £189 per annum (£16 per month) for an average part time member and £316 per
annum (£26 per month).
A reduction in take home pay amongst low and average earners of this magnitude would be
likely to see a significant reduction in membership of pension schemes that would in turn
make those schemes less sustainable.
One tax relief that members tend to already be very aware of is the tax relief on the 25% of
the value of their pension benefits that can be taken as a tax-free lump sum. Although many
may not take up the full amount when they consider the often bad exchange rates of
pension into cash they still value the option to take part of their benefits as a tax-free lump
sum. UNISON believes this should be retained.
Next steps
UNISON very much hopes that this consultation will only be a first step and the Government
will not simply impose changes in haste to give a short term windfall to the Treasury that
would have serious implications for existing and future savers.
We call on Government to set up an independent commission to consider any changes and
the transitional arrangements that would be needed if there were any fundamental
changes.
Response to the questions set out in the consultation.
1. To what extent does the complexity of the current system undermine the incentive for
individuals to save into a pension?
Evidence suggest it is the cost to the individual not the ‘complexity’ of the system
There is no evidence to suggest that providing tax relief at source on pension contributions
creates complexity that undermines pension saving. Indeed we are seeing record numbers
of savers being auto-enrolled into pension schemes with relatively few opt-outs across the
board.
There is no better evidence of this perhaps than in public service pension schemes where
membership density is relatively high. For example, close to 90% in the NHS Pension Scheme
and around 75% in the Local Government Pension Scheme.
Memberships of most good pension schemes that are still open to new entrants are
increasing.
2. Do respondents believe that a simpler system is likely to result in greater engagement
with pension saving? If so, how could the system be simplified to strengthen the incentive
for individuals to save into a pension?
Better communication setting out that the current system is not as complex as people
believe. Clearly setting out the current tax relief on pension contributions is likely to result
in greater engagement and incentive to save.
A recent Hargreaves Lansdown survey of 2,300 investors revealed that 45% of respondents
said that removing upfront tax relief on pension contributions would lead to them saving
less, more than twice the number who said they would save more. This proportion rose to
more than 60% where only savers below the age of 40 were considered.
Individuals (and particularly the young) need a real incentive to save and tax relief at source
is a key component in helping to enable this.
Offering tax relief at source is a relatively simple system and removing this does not increase
simplicity or offer greater saving engagement. It simply raises more immediate money for
the Treasury whilst shifting the burden of decent, sustainable, pension provision to future
Governments.
UNISON does however believe there could be some merit in looking to make the tax relief
system more proportionate and progressive across all savers.
Introducing a flat rate of tax relief at the 33% level so that the Government would in effect
contribute £1 for every £2 invested in a pension would seem to achieve this. This is simple,
transparent and offers an incentive to everyone to save. Particularly if this was coupled with
the removal or increase of the current pensions tax relief caps.
3. Would an alternative system allow individuals to take greater personal responsibility
for saving an adequate amount for retirement, particularly in the context of the shift to
defined contribution pensions?
With the decline of good defined benefit pension provision in the UK individuals have to
take more responsibility. But most cannot contribute enough on their own without sizeable
contributions from their employer so removing/reducing tax relief on contributions may
well have the opposite affect resulting in more unable to take responsibility and more in
poverty after they can no longer find work and have to rely on the State.
UNISON strongly believes that removing up front tax relief is more likely to discourage
pension saving and risk undermining the relative success of pensions auto-enrolment. More
and more people are starting to save and the real problem is the amount being saved, not
the numbers of people who are starting to save.
Government policy needs to be focused on increasing individual retirement outcomes by
increasing overall pension contributions and particularly through looking to maximise
pension accrual amongst the lowest paid.
Looking to maximise employer contributions through raising the minimum auto-enrolment
contributions would be a good start in this area.
4. Would an alternative system allow individuals to plan better for how they use their
savings in retirement?
The nature of defined contribution provision makes it difficult to plan for retirement with
the amount of money uncertain and all the risk on the individual even with life styling it isn’t
until near retirement the member can estimate with any degree of certainty what they will
have to live on. If contributions are not tax-free the member will contribute less that would
probably outweigh any advantage of the lump sum/pension when known being tax -free.
UNISON’s view is that a move to a TEE system could do quite the contrary as savers would in
effect be asked to trust the Government that the tax-relief system does not change to their
detriment. This will be a big ask for savers given the recent State Pension Age changes and a
current feeling that the Government’s principal aim is national deficit reduction and not
long term sustainable pension provision.
5. Should the Government consider differential treatment for defined benefit and defined
contribution pensions? If so, how should each be treated?
Yes employers that are prepared to keep some of the risk by running a form of defined
benefit scheme should have tax incentives.
Recent research undertaken by Hymans Robertson revealed that as many as 250 defined
benefit schemes could close in the next 9 months if they were no longer granted tax relief
on their deficit recovery payments.
Hymans Robertson also calculated that moving to a TEE system could reduce the salaries of
public service workers by 2%. Reducing the take home pay yet again of public service
workers could be catastrophic for public service pension schemes.
These members have already been subject to very significant pension contribution
increases, scheme reform plus face an imminent National Insurance hike. All amongst a
relative pay freeze. Plus moving to a TEE system of tax relief undermines the 25 year
guarantee given by the Government in relation to public service pension scheme changes.
Employers that operate a defined contribution pension scheme where the employer
contribution is inadequate should suffer tax disincentives to reflect the risk that their under
contribution poses to future tax payers.
6. What administrative barriers exist to reforming the system of pensions tax, particularly
in the context of automatic enrolment? How could these best be overcome?
UNISON believes that it would be extremely difficult to transition from EET to TEE in defined
benefit schemes in particular. How would tax reliefs in the past be assessed? There would
need to be a significant transitional period.
7. How should employer pension contributions be treated under any reform of pension
tax relief?
Clearly if employers no longer get any tax relief on their pension contributions pension
schemes would fold and services cut. It is highly likely that the woefully inadequate
employer contributions to auto enrolment and defined contribution schemes in general
would be cut even further. So any reform must retain incentive for the employer to
contribute adequately to pension provision.
Employers need to be encouraged to offer good quality pension provision and make decent
contributions so it is vital that they are offered every encouragement to do so. Otherwise
the real losers will be the Government of tomorrow that will need to deal with the problem
of inadequate pensions in retirement by increasing welfare payments.
8. How can the Government make sure that any reform of pensions tax relief is
sustainable for the future?
The answer is of course it can’t as future Governments cannot be prevented from changing
the system. Any ‘reform’ that resulted in lower overall tax relief now would just be another
stealth tax on the working population with no certainty that their benefits would remain tax
free when they reached the age to take their benefits in the future.
Our understanding is that the Government would raise an estimated £50 billion (based on
2013/2014 figures) if it was to move to a TEE system. We sincerely hope this is not the
primary objective of this exercise.
There have been plentiful changes to pensions in recent years and with automatic
enrolment bringing more and more people into saving for their retirement it is vital that
future reform is relatively limited to build trust and to further encourage meaningful saving.
UNISON believes that with this in mind it is vital to maintain tax-relief at source on pension
contributions. As we have stated throughout this paper we believe there is potential merit
in introducing a flat rate of tax relief, phased in at a cost neutral level that we understand
would be around 33% across all forms of pension saving. A £1 top up from the Government
on each £2 saved is easy to understand especially for those in defined contribution
arrangements and offers a meaningful pension incentive for all.
If introduced a fixed rate should apply to all levels of pay (i.e. those below the tax threshold
on pay) so even the lowest paid would get a tax relief incentive to save.
If this was linked to the abolition or increase in the Annual and Lifetime Allowances the
burden on the higher paid of this change would be significantly reduced and less likely to
lead to opt outs amongst the groups used to higher tax reliefs. They would still get a
reasonable level of tax relief that would be significantly better than just simply abolishing
tax relief above the basic rate tax level.
If the reform meant that pensions tax relief granted to higher earners was reduced and
increased for lower earners then this could be genuinely redistributive and allow greater
overall engagement in pension saving.
For more information about this response please contact:
Glyn Jenkins, Head of Pensions and Alan Fox, National Pensions Officer.
g.jenkins@unison.co.uk a.fox@unison.co.uk