Think-tank calls for overhaul of UK tax relief system

● Reform ‘would save Treasury £10bn’, but critic says it would ‘create turmoil’

A conservative think-tank has urged the UK government to reform its pension tax relief system that is “incomprehensible” to the public, as it announced today that British household savings are at a record low.

However, one pensions expert said the suggestions would cause “turmoil”.

The Centre for Policy Studies has revealed that Britain’s household savings ratio – the amount of money available to save as a percentage of total disposable income – has plummeted to 4.9 per cent, the lowest level since records began in 1963. And it called for pensions reform that it claims would save the Treasury some £10 billion each year and “dramatically simplify the savings landscape for people in all income brackets”.

“With savings rates falling and the top 1 per cent of earners receiving double the pensions tax relief of half the working population, the time has come to reform the system,” it said.

The centre, founded in 1974 by Margaret Thatcher and Sir Keith Joseph, pointed to the “complexity, cost, and inflexibility” of the nation’s current pensions system, along with a “widespread distrust” of the pensions industry, for discouraging basic rate taxpayers from putting money away for the future.

The report, authored by research fellow Michael Johnson, sets out five key recommendations it says would broaden the country’s savings base, benefiting low-income earners, boosting gender equality and enabling more low paid employees to qualify for auto enrolment contributions.

The proposals include replacing tax relief on pensions with bonuses on individual and employer retirement savings contributions, and launching a workplace ISA to hold employers’ contributions, locked in until the age of 60.

Johnson said: “The current system of tax relief is incomprehensible to the general public. Tax relief costs the government billions each year but 68 per cent 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.”

Robert Colvile, director of the Centre for Policy Studies, added: “The pensions savings landscape is complex and many people are put off from adequately preparing for their retirement. The proposals put forward in this paper would incentivise mass savings and save the Treasury an estimated £10bn a year. ”

However, Steven Cameron, pensions director at Aegon said: “An attempt to demolish the current pensions system… would create decades of turmoil for savers, new political risks around taxes on future savings proceeds and no guarantee of any improvement in the overall savings landscape.”