Constant changes cause confusion
Pensions should be tax free and simpler – survey
A survey has revealed a demand for pension contributions to be scrapped and replaced with tax-free pension payments in retirement.
When asked to choose the most appealing tax scenario for their pension, only just over a quarter (29%) picked the current system – where people and their employers receive tax relief on their pension contributions, and the pension is partially tax free at retirement with the remainder being taxed.
The research by PwC also reveals many people also don’t understand how pensions are taxed; 58% of Scots surveyed were unable to correctly identify the current system.
Alison Fleming, head of pensions, PwC in Scotland, said: “Continuous policy changes to pensions by Government has resulted in a system that is viewed as too complicated and is putting people off saving for their retirement.
“It’s clear that people want to see a once in a lifetime change to how their pensions are taxed, resulting in a simple and stable system they can understand and trust. The reality is that when it comes to tying up money for the long-term, people need an incentive – without it, our inclination is to focus on the here and now and more immediate financial pressures.”
Moving pensions towards a similar tax treatment as ISAs, where you contribute out of post-tax income and any returns are tax free, is by far the most popular preference as people say they would rather be taxed while they are working, than in their retirement.
Those questioned also said it would help them better plan for their retirement as they would not have to factor in tax deductions. Only one in ten Scots say the current tax exemptions on pension contributions incentivises them to save.
Six in 10 people said that constant changes by the Government to how pensions are taxed is the biggest barrier putting them off saving more into their pension. This is followed by people not understanding how much they need to save for an adequate retirement and the pensions system being too complicated.
Alison Fleming, head of pensions, PwC in Scotland, added:
“Any new system should include a simple to understand incentive from the Government for retirement savings that would allow the lifetime and annual allowance to be abolished.
“Moving towards an ISA-style tax system would create consistency across people’s savings pots and help people plan for their future with more certainty. Our research shows that rather than face tax deductions in retirement, people would much rather take the tax hit on their retirement savings while they are working.
“With the pensions industry in Scotland and the UK already grappling with pension freedom changes, this will be no easy tax. This would require a huge re-think from employers, pension providers and the Government to how they provide pensions.”