Think tank calls for new Isa in pension tax relief reform

Think tank calls for new Isa in pension tax relief reform

An influential think tank has called for the abolition of pension tax relief in a bid to help low income savers and save the Treasury £10bn a year.

The Centre for Policy Studies said pension tax relief should be scrapped and replaced with bonuses on individual and employer retirement contributions.

The paper's author, Michael Johnson, said Britain’s household savings ratio has plummeted to under 5 per cent, with the top one per cent of earners receiving double the pensions tax relief of half the working population.

The report, out yesterday (27 August) came in response to the government's work on pension tax relief, as revealed by the Parliamentary under-secretary of state for pensions, Baroness Buscombe, at a debate in the House of Lords in June.

Mr Johnson had previously argued the case for an Isa-style tax relief system, whereby money would be taxed on the way in but free of tax at point of withdrawal.

The new paper called for a series of reforms, including the introduction of a Workplace Isa which would house employers’ contributions and where members would be locked in until age 60.

The bonus, which would replace tax relief, should be capped at a maximum amount any saver can get in a given year, the think tank stated, while calling for a reform of auto-enrolment to scrap the minimum earnings threshold.  

The think tank also called for national insurance contributions (NICs) to be replaced with bonuses on employer contributions, paid directly into the employee’s personal accounts.

Robert Colvile, director of the Centre for Policy Studies, said: "The pensions savings landscape is complex and many people are put off from adequately preparing for their retirement.

"The proposals put forward in this paper would incentivise mass savings and save the Treasury an estimated £10bn a year.

"It is vital that reforms are made so that people can access financial products which suit their needs today, and in the future."

Initial industry response has been sceptical, however.

Aegon’s pension director Steve Cameron said it was a move in the direction of scrapping pensions for Isas.

He said: "Reframing ‘pensions tax relief’ as a government top-up has many presentational advantages and moving to a single top-up rate somewhere between basic and higher rate tax rates would be fairer to lower earners.

"However, the underlying intention behind these proposals is another attempt to replace pensions with Isas.

"The problem is no-one can stop politicians of the future introducing new taxes on proceeds, so a pension Isa is much more risky than the current pension system under which tax relief is granted, and locked in, upfront." 

Ivor Harper, director at Park Financial, said while the current tax relief system was distorted, a workplace Isa would struggle in an already competitive market. 

He said: "It’s unclear how replacing pensions with Isas will help solve the problem of low income people not saving enough money. And I’m not entirely sure that the proposed bonuses are that different to tax relief.