Former pensions minister Ros Altmann believes the government could scrap pension tax relief altogether within the next two years following the completed rollout of auto-enrolment.
Speaking at the Personal Finance Society Festival of Financial Planning in Birmingham this week, Baroness Altmann suggested incentives for pension saving could be applied differently in future to encourage savers to pay more into their pension than the minimum levels required under auto-enrolment.
She said: “I would expect from 2019 onwards, once auto-enrolment is fully rolled out, there’s a good chance it will be made compulsory and there will be no tax relief – the incentive will be the employer contribution.
“The chances are once auto-enrolment is accepted and fully embedded, to save significant sums of money, the government could use the employer contribution as the justification [for pension saving], and then focus any spending on incentives to get people to go beyond the auto-enrolment minimum.
"Because quite frankly, the incentive of basic rate relief for the majority of the workforce is far lower than the incentive of the employer contribution. There will be potential for a chancellor to recognise the minimum for auto-enrolment is not enough. The incentive will be to do more than the minimum.”
Fellow former pensions minister Sir Steve Webb, now Royal London director of policy, predicted the current system of pension tax relief could be a casualty of the government’s continued focus on Isas.
He said: “In terms of where we’re going, the inexorable switch from pensions to Isas will be the most obvious trend. Raising Isa limits, squeezing pension limits; it’s happened six times in the last seven years. We could end up in a situation where you only get tax relief to build up a pension that would be enough for someone on, say, the national average wage, and everything else was Isas. That would be job done as far as the Treasury was concerned.”