Why pension tax relief reform is back in vogue

ment 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.”

There was widespread scepticism among witnesses to the Committee such as Michael Johnson, research fellow at the Centre for Policy Studies, and Sir Steve Webb, the Minister of State for Pensions from 2010–15 and now director of policy at Royal London.

Mr Johnson said: “There is a fundamental question that countries around the globe are struggling with, which is do financial incentives actually work? I am coming round to the idea that the answer is no.

“I would scrap all pensions tax relief, including employer NICs rebates. I would introduce a bonus structure that is an incentive disconnected from your tax-paying status. I would also bring down the annual allowance from today’s £40,000 to a number between £8,000 and £10,000. I would abandon the lifetime allowance.”

Sir Steve also postulated a reduction in the annual allowance and abolition of the lifetime allowance.

He added: “In terms of incremental reform, it has become hideously complicated. So simplification would be the most important thing.

“Instead of having an annual allowance, a tapered annual allowance, a lifetime allowance, have a simple, perhaps lower, if necessary, annual allowance.

“Having an annual allowance and a lifetime allowance seems odd; you are capped on the way in and on the way out, and the lifetime allowance is a cap on success.

“Stop tinkering. We have had six cuts to limits on tax relief in seven years.”

But he admitted: “In terms of big-bang reform, it would be very difficult to do because of the huge numbers of gainers and losers.”

Neil MacGillivray, of James Hay, told Professional Adviser that advisers might want to raise the subject with clients who are in a position to make further contributions ahead of the Autumn Budget.

He noted: “A change to tax relief is portrayed as a means of incentivising the majority to save for retirement, rather than just higher and additional rate taxpayers.

“With 52 per cent of all relief paid going to individuals earning more than £50,000, it is difficult to challenge the thinking behind a fairer distribution.

“Auto-enrolment has exceeded original estimates with, as at the end of 2017, an additional nine million people saving towards retirement, and offering the lower paid an upfront enhanced payment to their contributions can only add to its success.

“According to The Resolution Foundation, the introduction of a flat rate at 25 per cent would raise a further £4 billion a year for the Treasury.

“At a time when the Government is clearly looking for ways to increase revenue this helps justify such a radical change.”

All very relevant given that, according to Royal London, savers need to put aside more than a quarter of a million pounds to live ‘comfortably’ in retirement. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice