Steve Webb, the Pensions Minister, has called for a further overhaul of pensions; this time focusing on the tax-relief paid when contributions are made and the maximum amount which can be held in a pension pot without incurring tax charges.
Tax –relief on pension contributions
At present pension contributions attract tax-relief at a minimum rate of 20%. This means someone saying £80 into their pension will be ‘credited’ with £100; higher rate taxpayers can claim a further 20% reducing the net cost to £60.
Critics though have long suggested that the annual £7 billion cost of higher-rate tax relief could be put to better use, by incentivising those people on lower pay to save for their retirement and it seems that Mr Webb agrees.
Speaking to the Daily Mail, the Pensions Minister said: “Most people get 20% relief; some people get it at 40%. But the people who get it at 40% get shed loads. If you gave everybody 30% then that spreads it much more evenly. Clearly that is not government policy, it is not even Lib Dem policy yet – but I’m working on that.”
Mr Webb is not alone in wanting to reform higher-rate tax relief. Last month Labour revealed they would scrap higher-rate tax-relief for the highest earners and last year the influential Pension Policy Institute called for similar reforms to those suggested by Mr Webb.
Lifetime Allowance reform
Mr Webb also suggested that the Lifetime Allowance should be reformed.
From April 2014 the amount which can be contributed to a pension each year, and qualify for tax-relief, has been reduced to £40,000. At the same time, the Lifetime Allowance, the maximum which can be held in a pension before punitive tax charges are applied, has been cut from £1.5 million to £1.25 million.
However, Mr Webb also believes this should be reviewed, saying: “The lifetime allowance is a funny thing because it doesn’t just say if you pay in more than this you don’t get tax relief, you actually have a penal rate of tax. So to actually say that we will punish you if you go beyond our limits seems illiberal to me. If people want to put more money in to a pension we shouldn’t stop them.”
The thoughts of Mr Webb come hot on the heels of changes announced in the Budget, which will give savers even greater access to their pension pot.
Only time will tell whether the ‘kites’ being flown by Mr Webb, will ever become reality, although if they encourage more people to save for their retirement careful consideration should be given to the proposals.