The Conservative government is eyeing up big reforms to private pensions as chancellor George Osborne and Baroness Altmann, the new pensions minister, look at changing tax relief on pensions contributions and David Cameron has providers who charge excessive “exit fees” in his sights
The government is currently considering a raft of proposals which could radically change the way individuals save for retirement and access their pensions. Tax relief is seen as ripe for reform as the chancellor tries to plug the deficit, forecast to be around £70bn this year.
Because the current system is designed to promote tax-free saving, it gives individuals income tax and national insurance relief on pension contributions at their marginal rates. This means that people who earn less than £42,385 receive 20 per cent relief, but for higher earners the rates are 40 per cent for those earning up to £150,000 and 45 per cent for those earning more.
Altmann told the Financial Times, on a standalone basis the system was “regressive” and that the government was considering moving to a flat rate of tax relief. A flat rate would mean higher earners could still offset their pensions contributions against their income, but it would not be entirely tax free. Meanwhile, for lower earners, if a flat rate was introduced at a level above the current 20 per cent relief, it could mean they saved even more by paying into a private pension.
Osborne and Altman, however, have said that no decisions have yet been taken over whether to remove or reform the higher rates of pension tax relief. The government is currently consulting on proposals to reform the system and a final decision is likely to be announced in the Autumn Statement, on 25 November.
Separately, the government is also looking at whether the new annuity freedoms have led to providers charging pensioners high “exit fees” to get hold of their pension pots. In a consultation launched at the end of July, HM Treasury announced it would consider proposals to cap the amount providers could charge as well as make sure transferring between companies was easy for savers.
Pensions have already undergone bold reforms in recent years, as the coalition scrapped the need for people to purchase an annuity upon retirement and also introduced auto-enrolment rules which force businesses to offer their staff access to a workplace pension.