“Moving to a flat rate of pension tax relief is a radical proposal and one that must be carefully considered. Pensions are for the long-term and so any policy making needs to be made with that in mind. We cannot have an overhaul of the pension tax system only to find it flawed and altered when challenges present themselves. Consultation on how it could be implemented, and to which schemes, is important as on the surface it sounds like an easy thing to do, but in practice it is not necessarily the case.
“While a flat rate of 30-33% would be re-distributive and benefit basic rate taxpayers, it would be broadly revenue neutral for the government. And this begs the question, what will they do next? Once pension tax relief is decoupled from marginal income tax rates it is a slippery slope and there would be little to prevent future governments then cutting tax relief to 25% or even 20% to save money.
“It is also important to remember that income tax relief on pension contributions is not truly a relief in the conventional sense, but a tax deferral mechanism. Pensions are liable for income tax, but this is applied on the way out, not on the way in. This tax deferral system creates an incentive to save for the future and ensures people are contributing some income tax later in life, helping to smooth fluctuations of demography and the pressures of an ageing society.
“While a universal flat rate might be simpler to understand for some of the public, it is unlikely to make a dramatic difference on public comprehension of the benefit of pension saving. We need more than tweaks to policy to change the perception of pensions and their perceived complexity and open up pensions so that information is accessible, timely and is framed in a way that is easily understood. Financial education is a key part of that and can be greatly helped by pensions dashboards.”