The Government has refused to move to a single rate of pension tax relief due to the lack of consensus that a more radical reform is needed.
In its 18 page-long response to the Treasury select committee report Household finances: income, saving and debt, government officials also dismissed calls to scrap the Lifetime Isa.
In July, MPs argued pensions tax relief, the main financial incentive the government provides for long-term saving, was not an effective or well-targeted way of incentivising saving into pensions.
They said it should be fundamentally reformed and the government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief and promoting understanding of tax relief as a bonus or additional contribution.
In its response, the government argued it consulted on whether there was a case for reforming pension tax relief to strengthen incentives to save and offer greater simplicity and transparency, or whether it would be best to retain the current system, back in 2015.
“While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015,” the officials said.
No considerations were made to the Treasury select committee's suggestion of scrapping the lifetime allowance.
Another demand from MPs was the abolition of the Lifetime Isa (Lisa), saying it was too complex and not popular among savers.
The committee argued, at the time, that the product needed to be scrapped due to its perverse incentives and its inconsistency with the other parts of the long-term savings landscape, which, it said, had contributed to its limited take-up by customers and providers.
The Lisa was introduced in April last year and is aimed at a younger generation of savers who want to save for retirement or buy a first home.
It allows those aged between 18 and 39 to save up to £4,000 each tax year into the vehicle and receive a government bonus of 25 per cent of the contribution.
In its response, the government acknowledged the committee's view, but noted "no evidence was taken from any providers of the Lifetime Isa".
The officials noted that currently 19 providers offer the product and there are more than 190,000 open accounts, on which more than £170m has been paid out to date in bonuses.
"These numbers - which are likely to increase - demonstrate that people welcome the flexibility of the Lifetime Isa to save," the government said.
Conservative MP Nicky Morgan, chairwoman of the Treasury select committee, argued it is disappointing that the government "ignored the committee's call for the Lifetime Isa to be abolished, and will press on without reform".
She said: "Tax relief on pensions is not an effective or well-targeted way of incentivising saving, and the committee encouraged the government to consider replacing the lifetime allowance with a lower annual allowance.
"Following reports that the chancellor is considering a range of options for reforming pension tax relief in the Budget, the committee will keep a close watch on any announcements."
As the government plans to provide an extra £20.5bn funding for the NHS by 2023 to 2024, pension tax relief has been viewed as one of the likely targets of cuts in the next Budget.
Ms Morgan said: "The Treasury has not moved on several of the committee's recommendations, or demonstrated an increased sense of urgency required in some key areas identified by the committee.
"We will continue to hold the government to account for its record on improving household finances."
According to Tom Selby, senior analyst at AJ Bell, ripping the roots from the pension tax system just as automatic enrolment is bedding in would have been a monumental gamble by 'Spreadsheet Phil'.
He said: "Fundamental reform as some have suggested – such as introducing a flat-rate of tax relief – would hit right into Conservative heartlands and risk causing a rebellion among backbench MPs already riled by the Brexit negotiations.
“More importantly, it would risk the fragile savings culture being nurtured in the UK through automatic enrolment.
"Lack of saving remains arguably the biggest challenge facing society today, so anything that could potentially damage this needs to be avoided at all costs. The pragmatic approach being taken by the Government therefore feels like the right one at this time.
"The government is also right to knock back calls for the Lifetime Isa to be scrapped altogether. Criticisms of the new savings vehicle didn't appear to be based on any hard evidence.
"In fact, the Lifetime Isa has proven popular among younger savers and ditching it now – just as it gains traction in the UK – would have been a retrograde step."
Gem Durham, independent financial adviser at Obsidian, agrees that a single rate of tax relief would be fairer.
She said: "But I see a Labour government being more likely to bring that change in rather than a Conservative led one, and I would envisage it would be something that a government would want to do at the beginning of a term in office and not close to when there might be a general election – which is a possibility in the near future."
Regarding the Lifetime Isa, Ms Durham is pleased with the government's decision.
She said: "For basic rate tax payers, Lifetime Isas are more beneficial than pensions. I think this is a massive incentive to younger people who are in their 30’s or 40’s (you can continue to contribute until 50, as long as you started before 40).
"Ministers are so out of touch with the british public and their day to day worries and concerns. If they promoted Lifetime Isas properly and raised threshold to £10,000 (£8,000 with £2,000 bonus) per annum, they could solve a lot of the lower end of the middle classes savings problems.
"The providers would need to be on board too, as yet not enough offer, but that would change if their was more appetite."
maria.espadinha@ft.com
