Pensions minister pushes for 30% tax relief for all

Updated: 

LibDem Annual Conference

Let's scrap generous pension tax breaks for the better off. Instead, spread the tax relief around more for all. It's a new idea from pensions minister Steve Webb. Webb says he supports a flat 30% tax relief rate for all pension savers, whether they earn £25,000 a year - or £250,000.

Would it work?

Trickle down thinking

A simplified system might be more popular for many than the current set-up, emphasising the benefits of long-term pension saving as people live longer (and work longer). Currently a higher-rate taxpayer pays in 60p for every £1 built up into a pension - and a 45p taxpayer pays just 55p for a £1 pension contribution.

In contrast, an ordinary low rate taxpayer has to save 80p to earn that £1 earmarked for their pension. (Pensions are also still taxed at 20% for basic rate taxpayers.)

Deep suspicion of Britain's pension system remains, especially for non auto-enrolment pension savers where long-term pension fees and City commissions remain worryingly high, gnawing away at eventual returns.

Or just electioneering?

So some wide-ranging reform - following on from Osborne's decision to scrap annuities altogether - is interesting. Head of corporate research at Hargreaves Lansdown, Laith Khalaf, told AOL Money new moves likes the one suggested by Webb will likely increase as the general election looms closer.

"Generally it's [pensions] a fairly emotive subject. It's very difficult to divorce pensions tax relief from tax rates. And any attempt to do so necessitates hideous levels of complexity. That has been demonstrated with the previous Labour government when it tried to divorce pension tax relief from the tax rate you pay."

Either way, Khalaf adds, there would be a need for wholesale pension engineering to accommodate it. "We're right in the middle of auto enrolment. I'm not sure how much capacity there is to deal with more change here - but it's good to have the discussion."

Middle earners

But the time when higher rate taxpayers were thought of as substantially better off than a basic rate taxpayer is over. Nowadays if you pay 40% tax you may be lumbered with an enormous mortgage and relentless family expenses.

Increasing numbers of middle earners have been dragged into the 40% tax bracket. And many middle earners will see their planned pension pot under even more pressure if Webb's proposals come into force.

He's more positive. "Most people get 20 per cent relief, some people get it at 40 per cent," he told the Mail. "But the people who get it at 40 per cent get shed loads. If you gave everybody 30 per cent then that spreads it much more evenly."