Call for next government to replace pension tax relief with savings bonuses

The incoming government should consider scrapping “ineffective” tax relief and national insurance contribution (NIC) rebates on pension contributions, and instead replace it with savings-based bonuses, the Social Market Foundation (SMF) has said.

The report from the cross-party think tank noted that the Treasury is estimated to have provided £44bn in income tax relief on pension contributions last year, which were “disproportionally distributed to the wealthy”.

It also noted that an additional £28bn was paid out in NICs rebates on employer contributions, arguing that this is "largely invisible" to employees and unavailable to the self-employed, with NICs rebates primarily benefiting company shareholders.

Given the constraints facing public finances, the report argued that both tax-based incentives are an “ineffective use of scarce Treasury resource”, stating that bonuses should instead be paid on individual and employer (post-tax) contributions, capped at £2,500 per year.

In particular, the report suggested that a bonus rate of 25 per cent could apply to all savings up to £10,000, "more than adequate for 95 per cent of people".

However, it said that a “more progressive approach” to encourage those who find it hardest to save anything at all would be to pay a 50 per cent bonus on the first £2,000 saved, and 25 per cent thereafter.

According to the report, this would increase the size of most pension pots, with those on low incomes (including non-taxpayers), as well as people with multiple part-time jobs, expected to be substantial beneficiaries.

In addition to this, it estimated that the proposal would also save the public purse at least £10bn each year, as well as providing a radical simplification of individuals’ tax affairs.

More broadly, the report called for the introduction of a default process (with opt-outs) by which pension pots may be accessed in retirement.

In particular, it recommended an “auto-drawdown” phase from age 60 to 75, with people receiving between 4 per cent and 6 per cent of their total pension pot assets each year, and an “auto-annuitisation” of residual pots, at the age of 75, to provide a guaranteed income until death.

‍