RegulationApr 22 2014

Tax relief is latest pension reform battleground

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Appetite for further far-reaching pension reform is growing after the Budget liberalisation, with contrasting proposals for a radical revolution in pension tax relief prompting debate across the sector.

A report published yesterday (21 April) by the Centre for Policy Studies calls for the current relief regime to be scrapped altogether and be replaced by a system that will see HM Treasury make a ‘contribution’ of 50p for every £1 of savings irrespective of taxpaying status.

The current system offers savers tax relief equal to their marginal rate of tax, meaning a £1 contribution to a savings pot costs a saver between 55p and 80p.

According to the think-tank paper, the effective reduction in the amount of tax relief to a third of total contributions should be combined with the introduction of an annual allowance for savers of £8,000, which would be made up to £12,000 with HM Treasury contribution.

Savings in excess of this level would attract no contribution from government.

The think-tank said the change would overcome a fundamental dilemma: “income tax is progressive so tax relief is inevitably regressive”.

The proposals follow comments from pensions minster Steve Webb recently that suggested he was mulling the idea of reducing tax relief to a flat rate of 30 per cent and removing the annual allowance on savings, currently set at £40,000.

Under the Centre for Policy Studies plans, annual contribution limits on tax-incentivised Isa accounts would be merged with pensions to create a single ceiling of £30,000, effectively a reduction from the current combined annual allowance of £55,000.

Tom McPhail, head of pensions research at Hargreaves Lansdown and chairman of the Pension Income Choice Association, said he favoured the system proposed by the pension minister, which appeared “simpler and more attractive”.

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.

“Similarly the proposal for a combined Isa/Pension allowance of £30,000 looks quite restrictive, compared to today’s twin allowances amounting to £55,000.”