Pension savings tax relief, and tax free lump sum at retirement, should be replaced with a combined ISA and pension tax relief limit, the Centre of Policy Studies has argued.

The paper’s nine proposals include combining the annual contribution limits for ISA and tax-relieved pension saving into a single limit of between £30,000 and £40,000; and replacing the 25 per cent tax-free lump sum concession with a 5 per cent ‘top-up’ of the pension pot, paid prior to annuitisation, which would be cost neutral. Costly and ineffective: why pension tax relief should be reformed also proposed shelving higher rate tax relief, which would save £7bn annually, but reinstating the 10p tax rebate on pension assets’ dividends and interest income, at an annual cost of roughly £4bn.

Tax incentives for pension savings, including the 25 per cent tax free lump sum, have cost the Treasury £358.6bn in the last decade, Centre of Policy Studies pensions analyst and author of the paper Michael Johnson has calculated. Tax relief on contributions cost the Treasury £26.1bn in 2010-11, tax-exempt 25 per cent lump sums at retirement cost £2.5bn, NICs relief on employer contributions cost £13bn and tax relief on investment income cost £6.8bn.

Johnson said the incentives are “crude and misdirected” and “skewed towards the wealthy, who are increasingly treating pensions tax relief as a tax planning tool, rather than as an incentive to save. Conversely, tax relief is poorly understood by younger workers and lacks any emotional resonance”.

Other proposals include a flat rate income tax relief of 25-30 per cent, banning salary sacrifice schemes, increasing tax relief for contributions into children’s pensions, incentives for employers to encourage employees to boost contributions, and creative ‘safe harbour’ guidelines to exempt employers from class actions.

Share Story: