Advisers have called on the government to be attentive when considering any changes to pension tax relief after provider Hargreaves Lansdown suggested it should be abolished in favour of government top ups.
Several advisers warned if the government were to make any changes to the way pension tax relief works, the plans would need to be well thought out, avoid unnecessary complications and the process would take time.
This comes after Hargreaves Lansdown published a paper in which it urged the government to announce in the upcoming March budget a review of the UK’s pension tax rules.
Under current rules tax relief is paid on savers' pension contributions at the highest rate of income tax they pay.
But Hargreaves Lansdown has suggested this method should be scrapped and replaced by a pension top up system, either through the government or the employer.
Under the provider’s proposals all employee contributions would be doubled irrespective of their tax bracket. Hargreaves proposed three tiers of contributions.
For example, under tier one tax relief would be abolished on employee contributions but the employer’s minimum contribution would be raised from 3 per cent to 5 per cent.
This means every £1 paid into a pension by an employee will be at least doubled, with a salary cap on auto-enrolment contributions of £100,000.
Under tier two, employers would have the option to offer employees the right to pay up to an additional 5 per cent of pay into their workplace pension. Every additional £1 would then be matched by the employer.
This would give a maximum total pension contribution of 20 per cent of pay, again with a salary cap of £100,000.
The last tier, for those ineligible to save in a workplace pension or those wanting to top up their savings, is a £10,000 individual savings allowance, which would be matched by the government.
Nathan Long, senior analyst at Hargreaves Lansdown, said the government must reform the tax relief system now before it gets worse in the future and becomes even more complicated.
Currently the tapered annual allowance, and the net pay pension administration system are the biggest issues when it comes to tax relief.
The taper is hitting higher earning public sector workers with punitive tax bills, whilst the net pay system means some employees earning below the income tax threshold get no tax relief on their pension contributions.
Mr Long said: “Both the tapered annual allowance and net pay anomaly are horrible issues and to solve them in isolation will have knock on consequences. They both heap a lot of complexity into the system and our view is that we need a simple solution and we can do this now and change the system to remove complications.
“One of the things we are getting more agitated by is that tax relief is supposed to be used as an incentive for people to save but what has happened is that it has become a subsidy for people to save.