The Government may abolish pension tax relief to pay for the increased cost of introducing a flat rate state pension, according the Institute of Economic Affairs.
In his latest IEA blog, editorial and programme director Philip Booth predicts a “back door” tax rise.
He writes: “I suspect Steve Webb will say that tax relief on private pensions is ‘unfair’. He will argue that it is unnecessary if the state pension is not means tested – if people cannot become a burden on the tax payer why, he will argue, should people be encouraged to make extra pension provision.”
He adds: “In effect, by this “back door”, taxes will go up to finance a long-term increase in state pension provision.”
The Government announced earlier this month that tax relief on pension contributions will remain at the full marginal rate with the annual limit reduced from £255,000 to £50,000 per year.
Webb announced plans for the new flat rate pension of £140 per week earlier this week, but few details have been given over how it would be paid for other than by reducing administration costs.
Booth says the reforms should reinforce the contributory principle. He adds: “Each year for which somebody pays national insurance contributions, they should earn an entitlement to a fraction (for example, one fortieth) of a given pension and this should be indexed to prices until retirement.”