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CPS report calls for radical changes to pension rules

Abolishing the lifetime allowance cap and reforming tax relief on pensions are among measures that could save the Treasury billions, a new report has recommended.

The Centre for Policy Studies report, Incentivising Retirement Saving, outlines eight key changes to retirement saving incentives. CPS research fellow Michael Johnson, who is the author of the report, says they will save Treasury money as well as making pensions fairer for all savers.

Johnson proposes scrapping the current tax relief on pensions and replacing it with a Government contribution, to be paid by the Treasury, of 50 pence for every £1 saved. This would be paid whatever the tax paying status of the saver and would be subject to an annual cap. 

The report suggests pensions incentivisation schemes cost the Treasury £54 billion last year. Johnson told HR magazine the proposals would significantly reduce this figure by increasing the "effectiveness of spend" in the area. He said the changes would ensure more people would be secure in their future. 

"It's all about getting the majority of people saving, which is what most people want to see," he said. "It's a much better position than the situation of having a minority who can afford it saving more." 

Another of the key proposal is removing the 25% tax-free lump sum savers could take out from their pots.

Johnson said this is an emotive issues, especially for those approaching retirement. However, younger employees were less engaged with the idea.

"I have spoken to lots of people in their 20s and 30s," he said. "For them the benefit is so remote, with an amount that is still very uncertain. The changes have not been at all effective and are not worth the £4 billion that have been spent on them."

Proposals outlined in the report

  • Pension contributions from employers should be treated as part of employees’ gross income, and taxed as such.
  • Tax relief on pension contributions should be replaced by a Treasury contribution of 50p per £1 saved, up to an annual allowance, paid irrespective of the saver’s taxpaying status.
  • ISA and pension products should share an annual combined contribution limit of £30,000, available for saving within ISA or pension products or any combination thereof. This would replace the current ISA and pensions tax-advantaged allowances.
  • The 25% tax-free lump sum should be scrapped, with accrued rights to it protected.
  • The lifetime allowance should be scrapped. It adds considerably complexity to the pensions landscape and with a £30,000 combined contributions limit for pensions and ISAs, it would become less relevant over time.
  • The 10p tax rebate on pension assets’ dividend income should be reinstated.
  • People should be able 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.
  • The annual allowance should be set at £8,000, with prior years’ unutilised allowances being permitted to be rolled up, perhaps over as much as ten years, all subject to modelling confirmation.