SAVE £3 BILLION BY SCRAPPING HIGHER RATE PENSIONS TAX RELIEF WHILE BRINGING BACK THE 10p REBATE
In the lead-up to the 2012 Budget, leading pensions expert Michael Johnson examines the £30 billion spent on incentivising retirement savings, in Pensions: bring back the 10 p rebate and goodbye higher rate relief.
He has three aims:
- To reduce the total cost to the Treasury
- To reduce pensioner poverty
- To encourage a savings culture
His proposals for reform include:
- Abolishing higher rate tax relief
- Using part of the £7 billion annual saving to reinstate the 10p tax rebate on pension assets’ dividends and interest income (costing some £4 billion per annum). Such income should then be truly tax-free for pension funds.
- Combining the annual contribution limits for tax relief on ISAs and pensions saving, at no more than £40,000, with the full limit available for saving within an ISA. This limit could be used as a key cost control lever, with adjustments to it (driven by affordability) becoming a regular feature in the Budget;
- Replacing the 25% tax-free concession on lump sum withdrawals at retirement with a 5% “top-up” of the pension pot, paid prior to annuitisation, which would be of much more lasting benefit, to most people (this would be cost neutral);
- Catalysing a controlled trickle-down of wealth through the generations, within a tax-sheltered pensions framework;
- Providing an additional incentive to employers to encourage employees to boost their pension contributions.