Pension savers should be incentivised with a ’buy two, get one free’ deal on pensions tax relief, Friends Life says.
Pensions minister Steve Webb has proposed a flat 33 per cent rate on pension contributions as well as doing away with the £1.25m lifetime allowance.
Tax relief is almost certain to be in the sights of whichever Government emerges following the May general election.
Friends Life is in favour of the 33 per cent flat rate and also wants to push employees’ minimum auto-enrolment contributions up to 6 per cent by 2019. Under current plans, employees are due to contribute 4 per cent of their salary to their pension by 2018.
The insurer says employers’ contributions should remain tax-free and the annual allowance should be used as a “lever” to control future spending on tax relief. It adds that controls should be introduced to stop higher and additional rate taxpayers benefiting “unfairly” from salary sacrifice.
Friends Life group chief executive Andy Briggs says: “Currently, higher and additional rate tax payers make half of the pension contributions but benefit from 75 per cent of the tax relief. That has to change, to increase the pension savings of those that need it most.
“The principle behind the current system of pension tax relief is that tax is paid in retirement at the same rate as the tax relief given on contributions. But that is a myth, as only a small proportion of people continue to pay higher rate tax once they retire. Our proposal recognises that tax relief is simply the government’s contribution to people’s pension savings and says it should be given on equal terms to all.”