However, one of the objections to flat rate tax relief is that it adds considerable complexity to the system, especially for the millions of public sector workers still accruing rights under defined benefit pension arrangements.
But what if we were willing to be radical and have a separate system for DB and DC pensions?
With fewer than a million workers now accruing DB rights in the private sector, and that number declining every year, in the future DB will be largely synonymous with public sector.
So if one of the purposes of reforming tax relief was to tilt support from higher to lower earners, one way this might be achieved could be through cutting contribution rates for lower earners and raising them for higher earners, without needing to tinker with tax relief.
Or if the goal was to raise money overall, the generosity of the public service scheme could be reduced, again without needing to create new complexity in the tax relief system.
Indeed, if DB pensions were ring-fenced, you could probably do away with the annual allowance altogether, which would greatly simplify the system.
Rebranding tax relief
In the DC world, starting from a blank sheet of paper would offer the potential for radical reform. For example, why not simply regard tax relief as a government incentive for pension saving and load that incentive heavily towards those of modest means?
Pension tax relief could be rebranded as ‘matching’ or a ‘government top-up’ and could be restructured to give a big boost to lower earners.
For example, suppose savers were told that for the first £5,000 each year they put into a DC pension the government would also add £5,000, for the next £5,000 the government would add £2,500 and for the rest (up to a cap) the government would add £200 per £1,000.
This could greatly simplify the whole business of pension saving with no need for complex annual allowances and could make topping up your pension as easy as transferring your money between bank accounts.
Matching contributions would be much easier for people to understand and may be more likely to incentivise voluntary pension saving.
One reason why this is all so much easier in a DC world is that we already have the concept of tax relief delivered via the relief at source method. This is the approach used by personal pensions and also by some occupational schemes such as the government’s Nest scheme.
Under the relief at source approach, people pay into a pension out of their take-home pay and then the government makes a contribution directly into their pension equivalent to basic rate relief on the gross contribution.
