The pensions and benefits consultancy’s data is based on analysis of more than half a million people saving into defined contribution pension schemes through its own Guided Outcomes platform.
Moving to a flat rate of pension tax relief was one of the proposals included in the government’s Green Paper, which became the front-runner in January, according to Treasury sources.
Hymans Robertson claimed this new initiative will penalise middle class savers, discouraging them for putting aside sufficient money for retirement.
Partner Chris Noon said it will redistribute tax relief away from additional rate tax payers, which he argued is “justifiable” as they tend to save enough.
He said: “But it also takes tax relief away from higher rate tax payers, which is a problem as this is the group facing the biggest savings shortfalls in retirement.”
Patrick Bloomfield, another partner at the firm, said the easiest and fairest way for the chancellor to reduce the cost of tax relief on pensions and boost government finances quickly is to move to a capped rate of tax relief.
Mr Bloomfield said: “Capped rate tax relief would fit with existing payroll and pension systems, whereas the implementation of flat rate tax relief would be horrendously complicated.”
“In theory, flat rate tax relief could be effective at targeting tax relief at those who are currently under-saving for retirement, but the reality is given the Treasury’s budget, it will not make a meaningful difference.”
He pointed toconsumer research, which has shown that the number one disincentive to save is legislative change.
“So what is planned as a small benefit could end up being a major deterrent to savings; the case for flat rate tax relief just doesn’t stack up.”
People are just beginning to understand the pension freedoms, but will now potentially have to get their heads around a new pension tax-relief system.Mr Noon recommended that Mr Osborne limits the highest level of tax relief on pension contributions to 33 per cent, which would mean basic rate tax payers would get the full 20 per cent relief but higher and additional rate tax payers would get only 33 per cent.
He said: “Clearly any system has to be sustainable, both now and in the future.
“A capped rate of relief gives the government fiscal control, introducing a controllable cap on pension tax relief which can be changed independently of income tax bands to help balance the books. It will also provide stable long-term costs as a percentage of GDP.”
He added that a capped rate would be a less disruptive change for employers and the pensions industry than a flat rate, providing a better approach for employers in managing retirement provision.
Andrew Tully, pensions technical director at Retirement Advantage, agreed that the constant meddling and endless change with pensions has created complication and confusion.
“People are just beginning to understand the pension freedoms, introduced last year, but will now potentially have to get their heads around a new pension tax-relief system.
“If we need to move from the current system, a flat rate of tax relief of 33 per cent would be a clear and simple way to tell people about the benefits of saving for the future. For every £2 you put into a pension, the government would put in £1.
“If the government decides on a flat-rate any lower than this – which appears to be the likely outcome – it is questionable if this will encourage greater pension saving.
“People are just beginning to understand the pension freedoms, introduced last year, but will now potentially have to get their heads around a new pension tax-relief system.”
ruth.gillbe@ft.com
