Pension tax relief reform: Steve Webb's final hurrah?

Updated: 

LibDem Annual Conference

As the political parties gear up for the election next year, the pensions minister could be set for one final radical overhaul of how Brits save for retirement.

Pensions minister Steve Webb has already brought in auto-enrolment, given retirees access to all their pension cash on retirement and now he could do what all parties talk about but never dare do; reform pensions tax relief.

Pensions tax relief, despite including the word 'tax' is actually a generous benefit of saving into a pension. Every time you pay into a pension the government tops up the contribution by the highest rate of tax you pay – either 20% for a basic rate taxpayers, 40% for a higher rate taxpayer or 45% if you are an additional rate taxpayer.

However, although it is generous, it is also slightly unfair as the more you earn and the wealthier you are, the more of a tax break you get. A report by think tank Centre for Policy Studies says that it costs higher rate taxpayers just 60p to put £1 in their pension while it costs a basic rate taxpayer 80p to put £1 in.

The CPS wants a flat rate of pensions tax relief of 50p on every £1 saved. The CPS isn't alone in thinking this is a good idea, Webb has already said he supports a 30% flat rate of tax relief as a way to spread the tax more evenly.

This isn't a new idea and plenty of politicians have made reference to reforming the higher rate tax relief but none have ever had the guts to hit the wealthy and actually reform it - as it's seen as a real incentive for people to save into a pension.

But as pensions have been made more attractive in the Budget by giving access to the entire pot on retirement, there is already a strong reason to save into them and pensions tax relief becomes less important.

The death knell for pensions would only sound if pensions tax relief was scrapped altogether. If this was the case then I'm sure we would see thousands ditching pensions in favour of tax-free, and more accessible, ISAs.

A flat rate of pensions tax relief would still be beneficial to savers and be fairer. Yes, more people are paying higher rate tax but if we want to encourage pension saving across all of society then pensions need to be seen as attractive to all and saving into one equally beneficial.