Tax relief on pensions is in need reform in order to increase Britain's savings ratio, MPs have been told, as they kick off a wide-ranging inquiry into how to improve the financial health of the nation.
The Treasury Select Committee held a hearing this morning (14 November) on household finances which looked into ways of encouraging people to save more in general and particularly in pensions.
When asked what action the government could take to improve the amount people save, Michael Johnson, research fellow at the free-market think-tank the Centre for Policy Studies, said it should look at tax relief, including employer National Insurance contributions rebates.
Mr Johnson advocated replacing the current system of pension tax relief with a bonus system similar to the one offered by the Lifetime Isa, unconnected to a saver's tax paying status, which would correct the fact that at the moment higher earners are more incentivised to save than lower earners who arguably need to save more.
But he also cited the issue of band shifting as a reason for his view of the need for reform.
He said: "Band shifting is when someone as a worker he receives 40 per cent tax relief but when he retires he becomes a 20 per cent taxpayer
"There is an enormous gap which is going to get wider and wider from a Treasury perspective particularly as auto-enrolment contributions are ramped up. The tax relief bill will soar.
"Employee contribution is going to quintuple between now and 2019 and that will add further pressure on the Treasury in terms of tax relief."
Mr Johnson said the pension freedom reforms of 2015 had exacerbated this issue as it gave people more control over how they access their savings.
He pointed to the fact the Treasury has spent £46bn on tax relief for pensions but received only £14bn in income tax from pensioners.
Torsten Bell, director of the Resolution Foundation, a think-tank that works to improve the living standards of those in Britain on low to middle incomes, agreed with Mr Johnson, and said tax relief on pension savings was a "really expensive, inefficient way of subsidising savings".
He said: "If you are really rich we are doing a really good job of incentivising you to put money into various silly forms of venture capital. If you are really rich you are getting huge tax relief on your pension. If you tried really hard you could get to £1m with a tax relieved savings pot.
"We are doing a moderately awful job of encouraging those on middle incomes to save."
He said the government should focus on making auto-enrolment a success in order to improve Britain's savings ratio.
Ashwin Kumar, chief economist of the Joseph Rowntree Foundation, the social policy research and development charity, said: "I cannot see any justification for tax relief being higher than the basic rate of tax. The majority of the benefit goes to people who are better off who frankly are doing quite well in terms of their pension savings and planning."