Bee: Tory MPs miss the point about pensions tax relief

The founder of Jargon-Free Benefits said that the group of backbench Conservative MPs, who last week made calls to abolish higher-rate pension tax relief were making a “pointless argument”.

He said: “The deal between the state and pensions savers has always been a simple one: we are taxed just once on our money if we defer it by putting it into pensions saving and that’s when we come to draw it as income.

“And this is where the controversy lies. Higher-rate taxpayers get 45 per cent or 40 per cent tax relief by deferring income but can end up paying just 20 per cent on it when they draw it as a pension. This is where, commentators argue, the unfairness lies. To me, though, it’s a pointless argument.”

He said there was “no reason” why every part of pension saving could not be “tagged” with the rate of tax that was deferred and that will one day need to be levied when that money is paid out as future income. For example, if it is tax deferred at 45 per cent in 2013, he argued it should be taxed at 45 per cent when taken back in 2043.

Last week, the backbenchers put forward a proposal to abolish higher-rate pension tax relief, which coincided with a recommendation from the Pension Policy Institute to cap tax-free pensions lump sum at £36,000.