Originally sent on 21 May 2019
You may have seen that HMRC has recently published its latest raft of pension statistics. One of the main headlines is that flexible pension withdrawals hit a new high of just over £8bn in the 2018/19 tax year; up £1.5bn from just the year before. The other story you may have seen is the minor scandal over the change to the way HMRC calculates the income tax being received from pensions in payment, which has resulted in these numbers being significantly higher than previously thought. HMRC has moved from using sample data to predict these figures, to using Real Time Information (RTI) data from pension providers. The increase means that the Government is receiving much more in income tax from pensions than previously predicted, which means that the overall annual net cost of pension tax relief is lower than believed.
But what about the rest of the figures published at the end of April?
One of the major problems facing the Government in relation to pensions is that two of its main goals aren’t especially compatible: it wants to incentivise more people to save higher amounts for their retirements, while also holding a strong desire to keep the cost of tax relief down at a sustainable level. The long standing tension between these two objectives is most likely a factor in many of the pension rule changes we’ve seen over the last few years, and the statistics also seem to reflect this.
On one hand, the effect of auto-enrolment on savings habits is clear. The number of people contributing, even to just personal pensions, has increased each year since auto-enrolment first launched, reaching a high of 8.5m individuals in 2016/17; the most recent year for which figures are available. This is having a particular effect on young savers, with under-35s making up approximately 41% of the people contributing to personal pensions in the 2017/18 tax year, up from just 19% in 2012/13. Of course, there are still plenty of discussions about whether the auto-enrolment minimum contributions are good enough and whether they need to be increased in order for people to create meaningful savings pots. But these figures are still hugely encouraging: everyone has to start saving somewhere, and auto-enrolment is creating a pool of people who are beginning to save at a younger age. It’s possible that as a result, these savers could be more financially aware, more likely to consider increasing their contributions voluntarily when able, and perhaps even more likely to seek advice in the future.
The average amount being contributed is also increasing after an initial dip in 2012. Again, the effect of auto-enrolment is clear, with the dip coinciding with its introduction and the increases since broadly in line with the increase in the minimum contribution levels. There was a spike in 2015/16 which may have been caused by people taking advantage of the transitional annual allowance rules that year to align pension input periods to the tax year; this has resulted in a small dip in 2016/17, but there is still a general upward trend. It will be interesting to see, in later years, how much this plateaus after the last minimum contribution increases under current plans.
However, despite the greater number of savers and the increasing average contributions, the overall tax relief bill has not significantly increased in recent years. The last significant jump was in 2015/16, when the bill (ignoring the effect of pension income tax receipts) reached a peak of £38.6bn, up from £34.2bn the year before. Since then the figure has been lower, at £37.3bn in 2016/17 and £38.4bn in 2017/18. It seems highly likely that the tapered annual allowance, which was introduced on 6 April 2016, is squeezing the tax relief going to high earners to such an extent that it is effectively counteracting the increases caused by auto-enrolment.
Although the tapering rules themselves are much hated, opinion remains divided about the idea behind them: to limit the tax relief going to high earners, who are argued to be those in least need of an incentive to save. Certainly among the general public there may be little sympathy for tax advantages being limited for those earning six-figures. For advisers however, as long as these rules exist there will be a large pool of individuals who may require some additional help to make the most of their retirement savings.
The cost of pension tax relief has been widely discussed and scrutinised for years; particularly since the Treasury published ‘Strengthening the incentive to save: a consultations on pensions tax relief’ back in July 2015. This data remains a key source of information about how the costs are affected by rule changes and new policies, and will no doubt feed into decisions about future developments.