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Industry Insights
June 14, 2024

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

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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.

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Matthew Sinclair (left) and Chris Breward (right), Chartered Financial Planners at Wealth of Advice