Scrap Pension Tax Relief In Favour Of Lifetime Savings

A leading pension industry expert wants the government to ditch pension tax relief and switch ISAs into lifetime savings accounts.

In a move that would reverse conventional thinking about pension saving, Michael Johnson, a research fellow at policy think-tank the Centre for Policy Studies, is urging a complete overhaul of pensions.

Instead of rewarding savers with tax relief on the money they put into a pension, Johnson wants tax relief of 50p on every £1 saved in an ISA.

He claims that the current pension contribution tax relief model is flawed and offers an unequal advantage to high rate taxpayers.

Retirement savers receive the relief at the marginal rate of tax they pay – so the least well-off earners get 20% relief, while those who can afford to save more pick up 40% or 45%.

Radical overhaul

Johnson argues this radical overhaul would equalise tax relief on saving and encourage younger earners to save extra money.

However, ISA savers would have a cap on tax relief – Johnson suggests at £8,000 of savings a year, which would top up the saver’s account by £4,000.

Funding would come from scrapping pension tax relief and diverting the money to ISA savings.

The paper from the think-tank also recommends rolling junior ISAs into one savings scheme and automatically opening a lifetime saving account for each child born.

Savers could withdraw cash from their lifetime ISA at any time, but would lose the benefit of tax relief on the money they took out.

“I’ve been working on this problem for years,” said Johnson. “The big question how do you give people an incentive to save and at the same time give them access to their money?”

Mixed reaction

“Young people are always complaining they do not have any money to save and that if they put it into a pension, they lose access until they are at least 55 years old when they may need it earlier.”

Johnson revealed he has worked on the paper for six years and thrown away 27 drafts of his proposal before feeling confident to release the latest.

The study has received a mixed reaction in the financial press.

Many financial experts believe the current auto-enrolment pension scheme does the job Johnson is suggesting, while others see problems for politicians taking away tax reliefs from high earners.

Ros Altmann, the government’s business champion for older workers, said: “It is sensible to promote lifetime savings, but auto-enrolment is already filling that hole.”

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