Investors reject Isa-style pension tax reform

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Most investors support a radical overhaul of pension tax relief but reject proposals to introduce an Isa-style system, new research suggests.

A survey of 2,300 people by Hargreaves Lansdown found that the vast majority of savers believe replacing tax relief on contributions with relief on withdrawals would make them less likely to save into a pension.

This was particularly the case among younger people, with two out of three under 40s saying they would either stop or reduce saving in response to this reform. In fact, the only cohort backing an Isa-style system was those aged over 70.

But the overwhelming majority of savers across all cohorts were in favour of simplification of the pension tax regime, with the over 70 per cent of all age groups saying a flat rate system would be easier to understand than the current rules.

The firm says research captures the opinion of investors across all tax rates and a wide range of ages.

In light of the findings, Hargreaves is calling on the Government to replace tax relief with a flat rate “retirement reward” of 33 per cent. It says this could be presented to savers as “Buy 2, get 1 free”.

It also wants to see the lifetime allowance scrapped altogether, and the reversal of plans to taper away the annual allowance for higher earners.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Investors have made it very clear that they would welcome a simpler system than the present one, however any attempt to scrap up front savings incentives altogether would have catastrophic consequences for the UK pension savers.

“People are not willing to lock up their money for retirement on the promise that a future government in 30 years’ time would reward them for it.

“Tax relief is inefficient and poorly understood. The alternative of a ‘retirement reward’ set at a flat rate for all would be fairer, simpler and more effective.”