The government has received renewed calls to encourage greater saving through introducing a flat rate of pension tax relief.
In a report from the Treasury select committee on household savings, MPs say the government should give “serious consideration” not just to a flat rate of pension tax relief, but also promote greater understanding that it operates as a bonus or additional contribution.
The report also suggests the government should think about whether or not to scrap the lifetime allowance and replace it with a lower annual allowance.
AJ Bell personal finance analyst Laura Suter says: “Scrapping the lifetime allowance for pensions and controlling tax relief through the annual allowance would be a welcome development and stop people worrying about good investment returns resulting in a tax hit.”
“If a flat rate of tax relief encouraged more pension savings it would be a positive outcome, but the report also concludes that tax relief does not work as an effective incentive to saving, so it’s hard to see how it would make a significant difference. Before such a radical overhaul to the system we would want to see evidence that it would achieve the goal of getting more people saving for their retirement.”
The report also proposes getting rid of the Lifetime Isa altogether.
The MPs say: “This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”
Zurich head of retail platform strategy Alistair Wilson says: “This could be the death knell for the Lifetime Isa. Although it was well intentioned, many providers appear to have been turned off by a savings vehicle that has the complexity of a pension, but with fewer benefits for consumers.”
The report also calls on the FCA to reconsider whether savers should be forced to take guidance before accessing their pensions.