I wrote to you on 8 October regarding AJ Bell’s call for the Government to protect key pension tax incentives and put an end to speculation around the future of tax-free cash and pension tax relief.
On 1st October, the wealth manager launched a parliamentary petition urging a public commitment to a “Pension Tax Lock” – a pledge not to alter tax-free cash entitlement or pension tax relief for the duration of this Parliament.
AJ Bell argued that such a commitment would give savers much-needed certainty, enabling millions to plan for retirement with confidence.
As the petition attracted over 10,000 signatures, the Government was required to issue a formal response.
The response is as follows:
The Government is committed to ensuring pensioners have security in retirement and has launched a Pensions Commission to look at what is required to ensure the system is strong, fair and sustainable.
The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw on, throughout retirement. The Government is committed to supporting savers at all stages of life. That is why, for the majority of savers, pension contributions made from income during working life are tax-free. This is known as 'pensions tax relief'. This relief is available at an individual's marginal rate. For example, contributions from a basic rate (20 per cent) taxpayer who contributes to a registered pension scheme in 2025/26 receives tax relief at 20 per cent. This makes pensions tax relief one of the most expensive reliefs in the personal tax system, costing £78 billion in 2023/24.
Investment growth of assets in a pension scheme is also not subject to tax. From age 55 (or when scheme rules allow a pension to be taken), up to 25 per cent of the pension can be taken tax-free (capped for most at a maximum of £268,275), depending on scheme rules. Pension income received (for example as a regular annuity payment or as income drawn down from a pension) is subject to income tax at an individual's marginal rate, to reflect the fact that pensions in payment are a form of deferred income and have not been previously taxed.
With regard to the proposed ‘pension tax lock’, the Government does not comment on proposed tax changes or tax related speculation ahead of Budgets.
The Government recognises the importance of promoting confidence in pension saving and is committed to ensuring future generations of pensioners have security in retirement. This is why the government announced a landmark two-phased review of the pensions system days after coming into office.
The first phase, the Pensions Investment Review, focused on reforming the pensions landscape to boost savers’ pension pots. These reforms will be delivered through the Pension Schemes Bill. The Pensions Commission will build on these foundations and make recommendations to the government on the broader questions of adequacy, fairness, and sustainability to guide the long-term future of our pensions system. The Pensions Commission will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce.
I am afraid this kind of wishy-washy response was to be expected, and it doesn’t really take us any further forward.
As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
