We have a problem with our pension tax relief system. The tax breaks on pension contributions cost the government in the region of \u00a360 billion a year. <\/p>\n
Most people don\u2019t understand how they work, so as an incentive to save they are for many people a complete waste of money. <\/p>\n
Money newsletter<\/p>\n
The latest personal finance and investment news from our money team.<\/p>\n
\t\t\t\t\tSign up with one click<\/p>\n
Worst of all, in spite of the tens of billions sacrificed by the Treasury to this fiscal sacred cow, it largely bypasses the twenty and thirtysomethings of today. The typical beneficiary of the system is in their forties or fifties and, like as not, they are a well-paid public sector worker.\u00a0<\/p>\n
The younger workers of today are already being asked to prop up the triple-locked state pensions of their grandparents, with little prospect of enjoying similar benefits in their turn. They are struggling to buy a house or start a family and we need to make them a better offer on their pensions.<\/p>\n
This country\u2019s increasingly dire fiscal situation demands a more radical response. Even before we add in the off-balance sheet liabilities of our unfunded public sector pension schemes, our national debt has tripled in the past 20 years. Our debt interest is now about \u00a3100 billion a year. We are living beyond our means. A government that isn\u2019t ruthlessly cutting waste and stimulating growth is not doing its job.<\/p>\n
We were mis-sold austerity in the coalition years. Sure, there were cuts to departmental budgets but the state still never managed to balance the books. Rather than fundamentally reappraising the state\u2019s role in society, Cameron and Osborne just tried to carry on doing all the same things, only with slightly less money. This time it has to be different.<\/p>\n
On pensions, auto-enrolment has been the game changer. We can build on this success and reform the pension tax system. The state can and should now step back. <\/p>\n
Pension contribution tax relief should be abolished. Employers should be required to increase their contributions over time from the current minimum of 3 per cent, to a target rate of 10 per cent to 12 per cent. This would be the incentive for employees to join the scheme and make their own contributions. <\/p>\n
Tax would be deducted on the contributions before they were paid into the pension. Going forward pension income would be drawn tax-free but only on the new money; all existing accrued savings would still be taxed because they were accrued on the old, tax-relieved system. <\/p>\n
This means that the state enjoys a one-off windfall in the short term, still gathering tax on the old money but no longer giving tax relief on the new money.<\/p>\n
This new system would not be unusual, many countries around the world have this approach of taxing contributions but not the proceeds at the other end. The UK could add in some modest top up from the state to enhance the proposition, for example a \u00a3500 bonus for the first \u00a31,000 someone pays into their pension.<\/p>\n
Employers would need to be compensated for their increased pension costs. This could be done through lower employment taxes (goodness knows, there\u2019s plenty to choose from).<\/p>\n
We could also then sweep away many of the finicky rules, restrictions and allowances that over-complicate the system. The end result would be a radically simpler system around which ordinary people could navigate without needing a financial adviser. There would be a much smaller role for the state, and a strengthened relationship between employers, employees and their pensions. <\/p>\n
There would be clear incentives to save, weighted more generously towards younger workers. In all likelihood, as an added bonus it would also serve to bring the ludicrously generous public sector schemes closer into line with the private sector.<\/p>\n
Tom McPhail is a financial services expert specialising in pensions and retirement policy<\/p>\n","protected":false},"excerpt":{"rendered":"We have a problem with our pension tax relief system. The tax breaks on pension contributions cost the…\n","protected":false},"author":2,"featured_media":554891,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[84,4176,4174,4175,56,54,55],"class_list":["post-593376","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-finance","tag-personal-finance","tag-personalfinance","tag-uk","tag-united-kingdom","tag-unitedkingdom"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/593376","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/comments?post=593376"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/593376\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media\/554891"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media?parent=593376"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/categories?post=593376"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/tags?post=593376"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}