Pensions tax relief is expected to climb to £24bn this year, HM Revenue & Customs (HMRC) has predicted.
Pension tax relief, a government incentive to encourage people to save for their retirement by paying a bonus into their pension pots, is expected to rise even further as auto-enrolment contributions become the norm.
HMRC figures also show £16.9bn in National Insurance relief on employer contributions which means the Government will foot a £41bn bill.
Steve Webb, former pensions minister and director of policy at Royal London told Pensions Expert that the combined total of £41bn excludes tax breaks on personal pension contributions and the investment returns generated by pension funds. The total cost of tax relief would therefore reach £55bn.
“The worry is that they will be tempted to use pension tax breaks as a ‘cash cow’, useful for dipping into whenever they are short of money,” he warned. Webb urged the government to set out a ‘strategic, long-term vision’ for how public money could be ‘better used’.
Aon’s senior corporate pension consultant, David Parfett, said: “With Budget saving options seemingly narrowing for the government and given that the combined cost of pension tax relief is already greater than the UK defence budget, reforms of the current system seems highly likely, particularly as a significant proportion of this spend is being directed to higher rate tax payers. This spend is also only set to increase further when minimum contributions for auto-enrolment apply in April 2018 and again in April 2019.”
He said that the amount being saved into pension plans has been “steadily increasing” since the introduction of auto-enrolment which is “a very positive trend”.
However, he also said that the government faces a dilemma. “It is even more important that any reforms must not overly discourage people otherwise it risks a reversal of the good work made so far.
“One saving grace - for the government - is the additional tax raised from people making use of pension freedoms is three times greater than originally forecasted and now in excess of £1.5bn."
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