Scrap tax relief on pension contributions, think-tank argues

The government should scrap tax relief on pension contributions and replace it with a Treasury contribution of 50p per £1 saved, the Centre for Policy Studies has argued.

In its latest publication Retirement Savings Incentives, author Michael Johnson said the contribution should be paid "irrespective of the saver’s taxpaying status".

Further, Johnson argued retirement saving incentives “cost a staggering £54bn last year” and stated they are an “ineffective, and inequitable, use of Treasury funds”.

“They have failed to catalyse the broad-based savings culture that Britain needs,” he said. “In addition, the recent Budget annuity reforms highlight the need to scrutinise the purpose and effectiveness of today’s pension-saving incentives, traditionally provided to compensate for pension products’ inflexibility.”

Johnson called for the 25 per cent tax-free lump sum to be scrapped along with the lifetime allowance.

“The lifetime allowance adds considerable complexity to the pensions landscape,” he said.

“The annual allowance should be set at £8,000 with prior years’ unutilised allowances being permitted to be rolled up, perhaps over as much as 10 years, all subject to modelling confirmation.”

Hargreaves Lansdown head of pensions research Tom McPhail said “with the election looming, it is inevitable that pension taxation is going to come under renewed scrutiny”.

“The key test of any reform is, will they result in more people making better provision for their retirement”, he said. “The CPS proposals look perhaps overly intricate. We don’t think this is a good moment to start attacking the tax free lump sum entitlement.”

Last week Minister for Pensions Steve Webb said a flat rate system of 30 per cent tax relief on pensions should be implemented for all workers.

Speaking to the Daily Mail, Webb said the introduction of flat rate tax relief on pensions is a policy that should apply for all, no matter what salary workers are earning.

“Most people get 20 per cent relief, some people get it at 40 per cent”, he said. “But the people who get it at 40 per cent get shed loads.”

“If you gave everybody 30 per cent then that spreads it much more evenly. Clearly that is not government policy, it is not even Lib Dem policy yet – but I’m working on that. Personally I can’t see why we don’t have a much simpler system. And in that world, you probably don’t need a lifetime allowance.”

The Pensions Minister said there are also plans to provide new savers with estimates of how long they are expected to live in retirement.

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