Opting for a single rate of tax relief would create a fairer and more sustainable system for pensions saving, according to the Association of British Insurers.
The body has set out reasons why it would be positive for chancellor George Osborne to switch-up the current tax relief system.
Yvonne Braun, ABI director of long-term savings policy, said introducing a flat-rate savers’ bonus could provide a “massive boost” to the average worker’s savings by encouraging them to save and helping to build their retirement pot.
According to FTAdviser.com’s parent publication the Financial Times, the chancellor is expected to announce plans to abolish tax perks for higher earners during his March Budget.
It is thought the overhaul of the system could see a new single rate tax incentive of between 25 and 33 per cent.
This follows a seven-month review into the current system.
Despite the fact basic rate taxpayers account for the vast majority of savers, they currently receive less than 30 per cent of government spending on tax relief for pensions.
Ms Braun argued introducing a fresh system is the best option available to ensure taxpayers have a pension pot large enough for potentially significant costs during retirement.
She said: “Taxing people’s pension contribution upfront risks putting people off making provisions for their retirement, and would significantly damage our economy in the long term by shifting the entire tax burden onto the working age population.
“Overall, introducing a single rate of tax would benefit future generations, ensuring that we do not create long term fiscal problems for the sake of short term policy gains.”
The ABI argued that a new flat-rate Savers’ Bonus would be:
1) Simpler
A flat rate of 25 per cent or 33 per cent could be presented as a top up of £1 for every £2 or £3 that savers contribute, making savings much more visible and simple to understand for both workers and employers.
2) Fairer
It would help those low and middle income earners to build up a bigger pension pot by providing government support for their retirement saving.
At the moment, basic rate taxpayers only get £1 for every £4 put in, while higher rate payers get £2 for every £3 put in. According to the ABI a savers’ bonus would top-up pensions equally for all savers.
3) More sustainable
A single rate would enable the exchequer to make fiscal savings easily and sustainably, bringing in about £1.3bn a year from defined contribution pensions alone.
A new system of flat-rate tax relief does not rely on tax receipts being brought forward, so the ABI stated savings would be sustainable over the long term, and would not increase liabilities for future governments.
The body added that a move to the so-called Pensions Isa, however, would have “damaging” long-term effects on the UK economy, echoing concerns from pension providers outlined last year.
katherine.denham@ft.com