Speculation the Treasury is reviewing linking pension tax relief to age has met with a mixed response from the industry.
In September this year, Hargreaves Lansdown floated the idea of linking pension tax relief to age.
The proposal, put forward by head of retirement policy Tom McPhail, would see pension contributions granted government top-ups of 100 per cent of the contribution, minus the saver's age.
Today (12 October) the firm has confirmed it has written to the Treasury with a list of recommendations including this one.
Later in September, Work and Pensions select committee member Steve McCabe has proposed reforms linking pensions tax relief to age and income, in a move that he said would promote inter-generational fairness.
Old Mutual Wealth pensions specialist, Jon Greer said it is questionable whether an age-linked system of pension tax relief would really create a more effective, better-targeted incentive to save.
He said: “In principle the proposals make sense, but in practice they would need to be tested extensively to ensure they achieved the desired impact.
“Were these proposals taken forward it would see the UK commit to a social experiment on a grand scale, with the results only becoming apparent decades into the future when today’s younger savers are headed toward retirement."
He added despite the generous relief available on pension contributions today, many people aren’t fully aware that system of incentives exists, adding simply changing that system is not going to make any difference to the way those people think about long-term saving.
“There are a lot of people that choose to boost their pension contributions when they inherit money, sell a business or simply start earning more in salary and bonuses when they’re older. While they miss out on decades of investment growth by doing so, those people that planned to save later in their working lives would be punished by an age-linked system.
“And we should not under-estimate the risk that further reform to the pension system may leave people disengaged. It takes time to adapt to change. Consumers are still getting to grips with auto-enrolment and pension freedom reforms, which radically alter the way we accumulate and decumulate savings respectively. Another change to the system might just leave people more confused.”
Kate Smith, head of pensions at Aegon said it is good to see new ideas being proposed by the industry ahead of the chancellor’s Autumn Statement.
She said: "We also support incentives that encourage people to start saving earlier, however under this idea, year after year, the incentive to contribute to pensions would decline which would be a challenging message to handle.
"Even with generous incentives, it’s arguable that the majority of younger savers will prioritise other goals such as a house purchase, meaning that by the time they turn their attention to pensions, the incentive will already be declining. The reality is that there are already too many people in their 40s and 50s playing catch up today.”
A spokesperson for the Treasury said: “Responses to the pension tax relief consultation last year clearly showed there was no consensus for reform.
"The government concluded that with the lack of consensus and the roll out of automatic enrolment ongoing, now was not the right time to undertake fundamental reforms to the pension tax system.”
