Sheriar Bradbury, managing director of Bradbury Hamilton, says the government should leave the annual and lifetime allowances alone and introduce a flat rate across the board. How does 30% sound?
Come April next year, pension investors will see the axe fall on their annual and lifetime allowance.
In a bid to protect the government coffers, the chancellor announced a reduction in the lifetime allowance from £1.5m to 1.25m and the annual allowance from £50,000 to £40,000.
It marks the second time that Osborne has slashed the amount people can save into their pensions since his appointment in May 2010, and has inevitably prompted a wave of debate among investors.
It's time for a flat rate pension tax
But, while some may view a reduction in the amount people are allowed to save as a step in the right direction for a government struggling to make ends meet, I think the approach is deeply misguided. A far better move would be to leave the allowance untouched but lower the overall higher rate tax relief and introduce a flat rate across the board.
If we're honest, higher rate tax relief is of minimal value, except to those who have the privilege of earning the highest wages, and serves no social good.
The government would be better off scrapping the current tiered system and introducing a flat rate tax relief of around 30% that applies to everyone's contribution, regardless of whether their pay is at the lower or higher end of the scale.
While I've no doubt such a decision would prove unpopular with higher earners, I believe there needs to be greater incentives for lower earners. Lower earners receive much lower tax relief than their higher earning counterparts and this unfair system will only serve to deter people.
The whole idea of people saving into a pension is so the government doesn't have to make provisions for them. There should be encouragement and support in place for those on lower wages and less assistance for those on high wages.
The social argument
Many high-earners are likely to have other assets to live off, such as property, so there is little social argument to justify providing them with such attractive tax relief.
The government believes that, by capping the amount people are allowed to save, it will protect the public purse, but it fails to go to the root of the problem, which is all about motivating people to save in the first place.
Continuously moving the goalposts as to how much people are allowed to accrue on a yearly and lifetime basis is confusing and will prove off-putting in the long run. Already, we have seen people in their droves questioning the need for a pension versus other savings vehicles and, by penalising people who have worked hard to save, the government will only strengthen this school of thought.
A flat-rate tax relief across the board would be the most efficient and fairest way of ensuring that pension investors are placed on an even keel for the future.
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