Pensions minister calls for 30% tax relief - again


LibDem Annual Conference

Pensions minister Steve Webb has again claimed pension tax breaks favour the better off and reiterated calls for a flat-rate pension saving rate of 20-30%. Such a move, it's claimed, would broadly be neutral for the Treasury. The Centre for Policy Studies has also called for change, including a 50p boost for every £1 saved.

What would work, realistically?

60p for £1

Currently an ordinary rate taxpayer has to save 80p to earn £1 for their pension, which is taxed. In contrast, a higher-rate taxpayer can pay 60p for every £1 put into a pension - and a 45p taxpayer pays just 55p for their pension £1.

Pensions, then, are hugely tax efficient for the better off: on the way in you get up to 60% tax relief while in retirement - depending on your circumstances - you pay just 20% tax on the income.

"The goal would be to have a structure in place that was stable," Webb told Money Marketing. People keep saying to me don't keep fiddling but as long as we fail to address the unfairness of the current structure people will go on fiddling."

Not fit for purpose

Fundamentally, Lib Dem Webb says the current system is unfair. Webb's comments have been supported by Royal London chief exec Phil Loney, claiming such reform "is absolutely the right direction of travel".

Additionally, says the Centre for Policy Studies, ISA and pension products could share an annual combined contribution limit of £30,000, available for saving within ISA or pension products (or any combination), replacing the current ISA and pensions tax-advantaged allowances.

Either way, the UK's pension system is widely seen as not fit for purpose. Throw in too the huge fees accumulated by pension providers - particularly for private pensions, decimating overall performance - from a UK market that is supposed to be super-competitive and super-sophisticated.

In reality, it's a ripoff. Bear in mind however that Webb's comments are directed at the Treasury - tax relief per se isn't his bag.

Labour initiative lacking

With auto-enrolment still being rolled out and layer-upon-layer of legal and Treasury-HMRC complexity to be examined and potentially resolved, don't expect change - unless the Labour Party attempt to get bold as the election nears.

So far, the most pension change Labour has committed to is is snipping higher-rate pensions tax relief. Yet 30 per cent of all tax relief is taken by 1% of top earners.

Why, then, isn't Labour running with this? Pension policy affects every single voter, rich, poor and in-between, wherever they live.