Aviva Proposes Flat Rate UK Pensions Tax Relief

by Amanda Banks, Tax-News.com, London

09 October 2009

Aviva, one of the UK’s largest pensions providers, has proposed a number of reforms to the UK pension system, including introducing a flat rate of income tax relief on pension contributions.

Aviva said that its research into consumer attitudes to saving and retirement has identified widespread confusion among the population when planning for retirement. The company said: “UK customers are aware that pension savings do enjoy tax benefits, but nearly all people surveyed do not understand how tax relief works for them.”

“Aviva proposes that a harmonised rate of tax relief (for example 30%) is adopted to replace the confusing higher and lower-rate tax relief system. This change would benefit and encourage the 85% of people who are basic-rate taxpayers, and could add more than 14% to the value of their pension fund at retirement. A 22-year old on a starting salary of GBP20,000 (USD32,000) could have an additional GBP47,000 in their pension fund at age 65.”

“The change would be neutral for many of the 15% of people paying higher-rate tax at retirement,” it added. “In many of these cases, the loss of additional tax relief in later life, i.e. down from (the higher rate) 40% to 30%, would be compensated by the enhanced tax relief earlier in life, i.e. up from (the basic rate) 20% to 30%.”

This proposal by Aviva follows the announcement by Chancellor Alistair Darling in the 2009 UK budget that tax relief for pension contributions made by those earning over GBP150,000 will be restricted to basic rate relief from April 2011.

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