Tax relief on pensions could cost £4bn

Compulsory pension contributions in the UK could cost the government £4bn a year in tax relief, Aon Consulting has calculated.

The additional cost arises because compulsion money, that would previously have gone in wages or profits, which are taxable, will go into pensions savings, which attract tax relief.

The figure is based on company’s research which calculates a rate of compulsion at 9% of pay in line with the Australian model.

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Donald Duval, chief actuary at Aon Consulting, said: “With compulsion being on the agenda of many politicians during the build-up to the elections, proponents of compulsion need to outline how they will fill the hole in government finances.

“While over time, compulsion would increase private pensions, and, therefore, reduce the need for the pensions credit, in the short term the government would still face a sharp drop in revenue, which would need to be accounted for.”