How abolishing higher-rate pension tax relief would affect savers

•    Reports over the weekend suggest the Treasury is once again considering scrapping higher-rate pension tax relief
•    A 30-year old higher-rate taxpayer saving £500 a month could end up with a pension worth £140,000 less if pension tax relief is limited to the basic-rate (20%)
•    Additional-rate taxpayers would face an even bigger hit to their retirement pots under the plans
•    Reform would also risk exacerbating intergenerational unfairness as younger savers would be unable to access higher and additional-rate relief

Tom Selby, senior analyst at AJ Bell, comments: 

“While the Treasury has been guilty of crying wolf on countless occasions on pension tax relief reform, it is clear there are people within Number 11 who want to slash and burn retirement saving incentives. 

“Reports over the weekend suggest the nuclear option of scrapping higher-rate pension tax relief altogether – and saving an estimated £10 billion in the process – is once again under consideration. This would have a significant impact not only on the pension outcomes of over 4 million higher and additional-rate taxpayers, but of those who may become higher earners in later life.

“A 30-year-old higher-rate taxpayer saving £500 a month in a pension could end up with a fund worth £140,000 less by the time they reach age 65 if tax relief is limited to the basic-rate. If the extra relief wasn’t invested in a pension they could be over £50,000 worse off over the course of 35 years.

“It’s worth noting a significant chunk of the circa £35 billion in pension tax and National Insurance relief costs incurred by the Treasury each year goes to defined benefit schemes, most of which are in the public sector. The Government would therefore inevitably have a significant battle on its hands with representatives of these workers, including those working in the NHS, if it decided to scrap higher-rate relief.

“There are also intergenerational issues to consider. Younger workers are more likely to be basic-rate taxpayers, with most enjoying their highest wages in the later stages of their careers. If tax relief were to be limited at 20%, young people - who have already missed out on cheap housing and generous defined benefit provision – would be unable to claim the extra tax relief bonus that was available to their parents.”