'Osborne should revisit radical ideas to reform pensions tax relief'

Radical pension reforms could significantly boost the pension savings of the majority of earners, but at the cost of substantial losses to high earners and major disruption to the industry, a report concluded. Independent think-tank the Resolution Foundation said these were likely cause for the Chancellor’s rumoured shelving of plans.A new report published today by the foundation examined the scale of potential gains and losses from the two main proposals that have been under consideration– moving to a flat rate of pension tax relief and pension ISAs.The foundation said the economic case for reform was “very strong even if the political argument is far more challenging”.‎The report said that the current system’s estimated cost of about £35bn a year is high while also branding it “highly regressive”.This is due to its calculation that the top 1 per cent of taxpayers receive 13 per cent of all tax relief, the same as the entire bottom 50 per cent of taxpayers.The report shows that moving to a flat rate relief of 30 per cent would boost the pension pot at retirement of a full-time median earner aged 30 by £11,200 (+13%), and by £3,200 (+14%) for a full-time earner on the National Living Wage (NLW).However, a high earner on £60,000 would lose £22,000 – a fall of 14 per cent compared to the current system.The foundation noted that the increasing number of lower earning savers being brought into the system as a result of auto-enrolment will reduce the revenue neutral flat rate over time, from 30 per cent to 28 per cent by 2025.The 33 per cent rate favoured by some would come at a substantial cost to the government, it said.Adam Corlett, economic analyst at the Resolution Foundation, said: “The government still has a range of options it could choose from, including flat rates of relief and the more radical option of moving to ISA-style savings. The second of these would need more consideration and consultation, particularly given the risks to an industry still bedding in other recent reforms.“The current political climate may have postponed the Chancellor’s plans to overhaul pension saving. But with the reforms having the potential to significantly improve the retirement prospects of the majority of workers it’s an issue that he should return to.”Authors of the report said a more radical move to ISA-style pension reforms – scrapping upfront tax relief and instead exempting pensions in payment from tax – also has the potential to boost the pension pots of low-to-middle income households.However, the report found that the scale of change – and the disruption caused to the industry – would also carry “huge risks”.

'Osborne should revisit radical ideas to reform pensions tax relief'

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