If the Government were to go down this route, the most obvious reform would be to scrap higher rate relief from a certain age. This would ensure that only those earning over £45,000 would be affected by the change.
AJ Bell has modelled the impact two possible policies could have on the retirement outcomes of a higher-rate taxpayer:
1. Scrap higher rate pension tax relief for over 40s
2. Scrap higher rate pension tax relief for over 50s
In both scenarios we assumed post-charges investment growth of 4% per annum. The below table illustrates how much older savers stand to lose out under each of the two reforms, in terms of a reduction in their retirement savings by the time they reach age 65:
Current pension contribution per month | Age 40 | Age 50 |
£500 per month | £64,968 | £31,237 |
£1,000 per month | £129,935 | £62,474 |
£2,000 per month | £259,870 | £124,947 |
Tom Selby, senior analyst at AJ Bell, comments:
“Removing higher-rate pension tax relief for older workers would have an enormous impact on savings incentives. If tax-relief is limited to 20% at age 40, a higher-rate taxpayer paying £500 a month into a pension could miss out on £65,000 in savings bonuses by the time they reach 65, while someone setting aside £2,000 a month could end up with retirement savings worth £250,000 less.
“The Treasury would also need to consider simplicity and fairness. Removing higher-rate tax relief is anything but simple when you factor in occupational and defined benefit pensions and how do you justify cutting pension tax relief for a doctor earning £60,000 in order to provide a tax boost for a City worker earning £500,000?
“This speculation further strengthens the argument for moving pension tax relief policy out of politics. Rather than altering the framework in an attempt to make short-term political gain, an independent commission should be established to review the system and consider what, if any, changes need to be made.”