We will soon know if higher and top rate pensions savings tax relief is cut in the Budget. The Treasury says this would save £10bn per year and justify it on the grounds of fairness.  This justification is flawed.

All taxpayers currently receive the same benefit from pension savings; they are not taxed when they save, with tax deferred until the point at which income is withdrawn.  Abuse is curbed by the annual allowance and the lifetime allowance.

Tax relief on pension savings has underpinned retirement income provision in the UK for decades and enables the UK Government to offer a State pension far lower than many other OECD nations*.  Government forecasts that this modest level of State provision is not affordable, with State pension ages set to rise to 68 or beyond.

Tax relief enables those who save, to retire when they choose to do so, with dignity.  It means that they remain taxpayers beyond their working years, as pension income is taxable, and VAT is payable on their spending.  Saving £10bn a year now may look attractive, but it will reduce longer term revenues.  The Chancellor should be persuaded that the immediate tax savings on offer are not a sensible price to pay when it means risking longer term economic stability.

Without full tax relief, higher rate taxpayers will most likely save less.  That means less pension income to tax in future, at the very time the ageing population peaks, with demand for health and social care rising.  With less tax revenue and fewer pensioners able to pay their own way, a future Chancellor could be forgiven for cursing their predecessor’s short sightedness.

Ending higher rate tax relief would exacerbate inter-generational inequality, with future generations unable to accrue the pension wealth they need to maintain a comfortable lifestyle.

Hardest hit would be mid life private sector higher earners.  They have not enjoyed defined benefit pensions to the same extent as older generations, and unlike younger workers, they did not have auto enrolment pension schemes from the outset.

If applied only to the individual taxpayer’s savings, it would disproportionately affect the self- employed, already the least prepared for retirement.

Taxing employer funding would be problematic for defined benefit schemes.  The short-term gains of £10bn a year could be wiped out if employers, instead of investing in their business, are forced to fund bigger deficits.  Few private defined benefit schemes remain open to accrual – and a tax charge on employer funding would reduce their number.

In the interests of fairness to future generations the Chancellor should resist the temptation to save £10bn a year now, only to leave his successors to pick up the bill. 

*OECD data shows the UK State pension is 29% of average UK earnings, the lowest in the developed world.

Kay Ingram is Director of Public Policy, LEBC Group