Pensions Minister Steve Webb MP has publicly supported a 30% flat rate of relief. He also hinted that the Lifetime Allowance is potentially redundant. These sentiments coincide with the publication of a new report from Michael Johnson: Incentivising retirement saving: the end of tax relief, and a new beginning.
Johnson evidences why retirement saving incentives, which cost a staggering £54 billion last year, are an ineffective, and inequitable, use of Treasury funds. They have failed to catalyse the broad-based savings culture that Britain needs. In addition, radical reform is in line with the recent Budget, which put an end any requirement to purchase an annuity, thereby significantly improving retirees’ pension pot flexibility. Traditionally, incentives have been provided to compensate for pension products' inflexibility: they are no longer valid.
Johnson proposes sweeping away today’s tax relief framework, replacing it with a simpler, more redistributive 50p per £1 saved. This should be paid irrespective of the saver’s taxpaying status, to overcome a fundamental dilemma: income tax is progressive so tax relief is inevitably regressive.
The report’s proposals combine common sense, fairness and simplification with a hard cash incentive of up to £4,000 per year: £12,000 (including £8,000 from the saver) is more than enough savings capacity for almost everyone. Accepting that the highest earners would lose out, Johnson offers them three quid pro quos: scrapping the Lifetime Allowance; reinstating the 10p tax rebate on pension assets’ dividend income; and the ability to bequeath unused pension pot assets to third parties free of Inheritance Tax (perhaps limited to £100,000), provided that the assets remained within a pensions framework.
Johnson hopes his proposals will appeal to both the political left and right, albeit for different reasons. From Labour’s perspective, tax relief’s inequitable distribution is a logical target (50p per £1 saved is highly redistributive). Conservatives will appreciate the virtue of improving the effectiveness of Treasury spending (measured by an increase in the number of long-term savers), accompanied by an opportunity to cut the cost of incentives: this should appeal to a cost savings-hungry Chancellor. Indeed, pensions tax relief is now the lowest-hanging fruit in Whitehall.
The eight specific proposals: