Scrap pension tax relief, says think tank

Published by Edmund Greaves on 28 August 2018.
Last updated on 28 August 2018

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.

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:

  1. Introducing a “generous cap” on the potential bonus savers could earn each year
  2. Scrapping the minimum threshold for auto-enrolled workplace pensions
  3. Replacing National Insurance Contributions (NICs) rebates with employer contribution bonuses paid directly to employees
  4. 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.”

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Two points about the

Two points about the Moneywise article:
Firstly it would be a good idea to include a link so we could more easily read the report on which the article is based.
Secondly, Michael Johnson's assertion that higher and additional rate taxpayers receive 68% of the total tax relief bill is simply not borne out by any statistical analysis of Treasury figures on the costs of tax relief.
As for Michael Johnson, this is the man who withdrew his total pension fund of £300k in one go after Pensions Freedoms were introduced, so paying 45% tax on most of the proceeds and bringing the fund into his estate where it became liable to a potential additional 40% IHT charge. I would confidently state he is the last man anyone in their right mind should take any advice from when it comes to our tax system!