21st April 2014
Tax relief on pensions should be replaced by a Government payment of 50p per £1 saved says a radical report by Michael Johnson for the Centre for Policy Studies (CPS).
The Government contribution would be up to an annual allowance and would be paid irrespective of savers’ taxpaying status. The report ‘Incentivising retirement saving: the end of tax relief, and a new beginning’ was published this week. The report argues the 25% tax-free lump sum should be scrapped and also calls for an end to the lifetime allowance.
The report also recommends that the ISA and pension products should share an annual combined contribution limit of £30,000.
Johnson says: “Retirement saving incentives, which cost a staggering £54bn last year, are an ineffective and inequitable use of Treasury funds.”
However some in the pension industry have criticised the proposals. Hargreaves Lansdown’s head of pension research Tom McPhail says: “Following the budget announcement of greater freedom of access to pension pots, and with the election looming, it is inevitable that pension taxation is going to come under renewed scrutiny.
“The key test of any reforms is, will they result in more people making better provision for their retirement? In most cases this means helping them to invest more money into well-managed long term investments. We can take it as read that an important test within political circles will be to not give any more money away on pensions and if possible to redistribute some of the tax relief away from high earners towards the mass of the population.
“In this context, the CPS proposals look perhaps overly intricate. We don’t think this is a good moment to start attacking the tax free lump sum entitlement. Similarly the proposal for a combined ISA/Pension allowance of £30,000 looks quite restrictive, compared to today’s twin allowances amounting to £55,000.”