Savers find the pensions system too complex, inflexible and unfair, according to a report from think tank the Centre for Policy Studies (CPS).
The CPS has called for tax relief on pensions to be abolished and replaced with bonuses that are awarded for individual and employer retirement savings contributions. It says these bonuses should be disconnected from tax-paying status.
The organisation believes these changes are necessary because the top 1% of earners receive double the tax relief on their pension compared to half of the working population.
- Can I pay into my pension, get government tax relief then withraw both sums - and do it again every year?
The CPS also noted that household savings ratios have fallen to the lowest levels since records began in 1963.
Michael Johnson, author of the report and CPS research fellow, says: “The current system of tax relief is incomprehensible to the general public.
“Tax relief costs the government billions each year, but 68% of that flows to higher and additional rate taxpayers who do not need such a large incentive to save.
“The government should focus its reforms on proposals which do the most towards creating a broader savings base – such as replacing tax relief with bonuses on pensions contributions.”
The recommendation echoes calls from the Parliamentary Treasury Committee in July for “fundamental reform” of pension tax relief, reported by Moneywise. The committee similarly described tax relief as an ineffective incentive for savers.
The think tank’s report also recommends:
- Introducing a “generous cap” on the potential bonus savers could earn each year
- Scrapping the minimum threshold for auto-enrolled workplace pensions
- Replacing National Insurance Contributions (NICs) rebates with employer contribution bonuses paid directly to employees
- Create a new “Workplace Isa” for employers’ contributions, only accessible aged 60.
Robert Colvile, director of the CPS, says: “The pensions savings landscape is complex and many people are put off from adequately preparing for their retirement.
“The proposals would incentivise mass savings and save the Treasury an estimated £10 billion 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.”