This means that for each £80 you pay into a pension the government adds £20. Higher rate taxpayers can claim back higher rate relief through their tax return.
But what if we stopped regarding these payments as ‘tax relief’ and simply saw them as a government match or top-up? We could do away with the business of higher earners claiming additional relief and could tier the government top-ups towards low earners in the way described above.
This could really incentivise voluntary pension saving for low and middle earners, something that is likely to be especially important given the Treasury’s continued blocking of increased rates of auto-enrolment contributions.
As ever, with pension reform, the devil would be in the detail on a change of this sort. Having different regimes for DB and DC pensions could create tricky border issues, such as the treatment of DB to DC transfers, or how to treat hybrid schemes with elements of both DB and DC. But these are unlikely to be unsurmountable.
The start of a new government with a big majority, willing to look across the pensions landscape and to come up with a coherent reform package, is a once-in-a-generation opportunity.
It is time to end the constant incremental changes to pension tax relief and to consider whether the huge sums involved could not do a great deal more good through a more radical shake-up.
Steve Webb is a partner at pension consultants LCP and a former pensions minister. He writes in a personal capacity.
