A thinktank has called on the government to scrap pensions tax relief and replace it with bonuses on contributions.
In a paper by Michael Johnson from the influential thinktank The Centre for Policy Studies, he says that the government should use a review into pensions tax relief to reform the system and broaden Britain’s savings
In June Departerment for Work and Pensions minister Baroness Buscombe said the government will examine concerns low-paid workers in net pay schemes are losing out in the current tax relief system.
In a response to the review published today, Johnson sets out five main proposals to broaden the country’s savings base and save the Treasury money.
In his report called Five Proposals to Simplify Saving, Johnson argues tax relief on pensions should be abolished and replaced with explicit bonuses on individual and employer retirement savings contributions.
He says these bonuses would not be connected to tax-paying status and also advocates the introduction of a cap on the total bonus any individual can receive in one year.
Other reforms proposed include scrapping the minimum earnings threshold for auto-enrolment and the replacement of national insurance contribution rebates with bonuses on employers’ contributions, paid directly into the employee’s personal accounts.
The final proposal is to introduce a workplace Isa to house employers’ contributions, locked in until age 60.
Johnson notes Britain’s household savings ratio has plummeted to 4.9 per cent, the lowest since records began in 1963.
He says the current system of tax relief is incomprehensible to the general public and costs the government billions each year.
He adds 68 per cent of it flows to higher and additional rate taxpayers who do not need such a large incentive to save.
Reacting to the report Aegon pensions director Steven Cameron says: “Individuals would ideally save for the future through both pensions and Isas.
“An attempt to demolish the current pensions system which serves millions of people, replacing it with yet more Isas, would create decades of turmoil for savers, new political risks around taxes on future savings proceeds and no guarantee of any improvement in the overall savings landscape.”