Whichever political party or group of parties gets to form the next government, it appears certain we will see changes in the way tax relief is offered to pension savers.
For decades pensions have been structured on the basis that contributions are paid out of untaxed income. This means those who pay tax at a higher rate get more relief on their pensions contributions. That up-front relief is significant, costing the government more than £25bn a year. Yet only 25 per cent of this huge sum goes to basic rate taxpayers.
Throughout the election campaign, a number of political parties have highlighted a potential raid to pension piggy banks as a way of funding other, more eye-catching policy.
Labour promise to cut tax relief on pensions to fund its jobs guarantee for young people and to cut tuition fees, while the Conservatives plan to use it to pay for a cut in inheritance tax on main family homes.
The Liberal Democrats meanwhile want a flat rate 33 per cent tax relief for all, regardless of the rate of income tax they pay.
NOW: Pensions is not against change to tax relief. But we want change that is made to be based on solid foundations.
If we are serious about embedding a culture of saving for retirement in the British psyche we need to build a stable consensus on how pensions should work. That is why we support the creation of an independent pension commission that can take a measured, evidence based approach to policy, and build cross-party support for a new pension settlement.
This approach has worked in the past. The independent pension commission established by Lord Turner in 2002 succeeded in securing cross-party support for both an increase in state pension age and for the auto enrolment of workers into pension schemes. The Turner consensus remains in place more than a decade later.
A new settlement for pensions should include targeting more tax relief at those on ordinary working incomes, to ensure those whose need to save is greatest are given enough incentive to do so.
It should also examine the way tax relief on ISAs operates, and consider how it can be made easier for working people to save more for their retirement. For example, the moment when people are most engaged with the benefits of tax relief is when they are filling in their tax return. So why not nudge taxpayers into saving more by allowing them to tick a box on their self-assessment tax return to make extra contributions into a nominated pension scheme?
When it comes to pensions, savers want stability and predictability. Successive governments’ habit of constantly altering the rules undermines confidence in the entire pension system and, in the long-term, is in nobody’s interest.