According to reports, the Government is again looking at axing higher-rate pension tax relief in an attempt to save significant expenditure.
The estimated £7bn of savings must be tempting to an administration desperately seeking ways to cut costs but it should be very wary of messing around with the biggest incentive people have to save into a pension.
Fears about an end to higher-rate tax relief were regularly expressed in recent years in the run-up to Budgets and pre-Budget reports. However, indications from Westminster are that scrapping higher-rate relief is back on the agenda and is being looked at closely in Conservative circles.
The LibDems called for higher-rate relief to be scrapped before the general election and it is hard to see Labour putting up much of a fight if the coalition proposed the move.
Advocates of scrapping higher-rate relief would suggest that much of the money is given to people who would have saved into a pension anyway and the Government funding could be better targeted.
Although the tax is deferred rather than being permanent relief, large numbers of higher-rate taxpayers will be paying income tax at the basic rate when they are drawing their pension.
But while, on paper, there may be more efficient ways of using Government funding, there are significant dangers in removing a simple and easily understood incentive for people to save for their retirement.
The forthcoming auto-enrolment reforms are an attempt to engage large numbers of people for the first time with the need to save for their future. It would be a retrograde step if many others who currently save into a pension are simultaneously disengaged due to the Government messing around with pension tax relief.
The Financial Services Bill last week unveiled the Financial Conduct Authority’s strategic and operational objectives.
This was a missed opportunity for the Government to introduce an objective of increasing levels of saving and protection in the UK, a move we believe would create a more balanced and effective regulator.