The Chancellor, Sajid Javid has confirmed his first Budget will be held on March 11 this year.
It is widely expected that this will contain proposals to reform the current pension system, in line with the recent Conservative manifesto.
These promises included a commitment to solve the annual allowance taper problem for key workers, such as doctors, as well as looking at the net pay problem for low earners. This problem has led some employees miss out on tax relief because of the type of occupational pension scheme used by their employer.
Hargreaves Lansdown head of policy Tom McPhail says these reforms could prompt a more radical review of pensions taxation.
He says: “The UK’s pension tax relief system is no longer fit for purpose. It has become complicated, inefficient and increasingly socially divisive; every year it consumes tens of billions of pounds of taxpayers’ money, much of which is poorly allocated, giving too much to some and not enough to others.
“The recent election result, giving the new Conservative government a clear mandate, presents an opportunity to confront the bloated inefficiencies of the UK’s retirement savings, addressing not just the immediate problems of the tapered annual allowance and the net pay issue for lower earners, but reforming the entire system for the 21st century.”
Currently anyone earning in excess of £150,000 a year has their pension contribution annual allowance reduced below £40,000. Once their income reaches £210,000, the annual allowance drops to £10,000 a year.
For some high earners and in particular, members of defined benefit schemes, this can result in them inadvertently incurring a tax charge. This has led to a situation where some key workers, most notably doctors in the NHS scheme, have chosen to turn down work and overtime, rather than risking a retrospective pension tax charge.
Aegon’s pensions director Steven Cameron adds that the government pledge for a “decade of renewals” should include strengthening the current pension system so it can cope with increased longevity and longer retirements.
He says: “Over the last decade, auto-enrolment has meant millions of additional employees are now saving into workplace pensions. The challenge for the coming decade is to make sure they are saving enough for the quality of life in retirement they aspire to.
“The Government now needs to advance previous proposals to increase minimum contributions and find solutions to ‘level up’ pension provision for the self-employed who are currently excluded from auto-enrolment.”
He adds that he hoped to see more details on how the pensions dashboard can support those saving for retirement and incentivise them to save more.
“Incentivise greater savings should benefit the economy. Tax reliefs for pensions play an important role here and may need reform to make them simpler.
“While there is also merit in giving a greater share of reliefs to lower rather than higher earners, it’s vital that any new approach still means it remains in everyone’s financial interests to save in pensions.
Former pension minister and campaigner Baroness Ros Almann agreed that that the significant victory for the Conservative Party could pave the way for radical pension reforms.
She says: “The NHS is perhaps the canary in the coal mine, alerting government to rising pension dangers: by signalling the damaging effect of attempts to clamp down on pension tax relief for higher earners under the current system, the government may decide that pension incentives and tax rules need a broader review.
“Rather than trying to reform the annual and lifetime allowances just for medical staff, ministers may be tempted to revive reforms of pension incentives considered in 2015/16.”
She says it seems “illogical” to have a lifetime limit on top of the annual allowances for pensions.
“I favour an annual limit only, with people feeling free to invest for strong returns over time, rather than punitive taxation if investments perform ‘too well’. Such a regime would be relatively simple for DC schemes.
“For DB schemes, I suggest annual contribution levels could be assessed using the accrual for the current year, in the current scheme, only. This should replace the complex estimated long-term career returns and inflation uplifts of the present system.”
However Altmann warned that there was a danger the government may try to turn pension tax relief and incentives into a “simpler” Isa-style saving regime. She said this could be hugely damaging to a savings culture and would increase pension poverty.