Tom McPhail, head of retirement policy, said: “We believe that policymakers need to stop thinking in tax relief terms and make contributions nothing to do with the rate of income tax paid, or level of earnings. Tax relief is complicated and most people don’t understand it.”
Under Hargreaves’ proposals, launched ahead of the Chancellor Philip Hammond’s first Autumn Statement on 23 November, the Government bonus would be based on ‘100-age’. People would receive £1, minus their age, for every £1 they pay into their pension. In this scheme, a 30-year old would receive a top-up of £70 for every £100 invested, while a 60-year-old would get a top-of £40 for £100 saved.
McPhail said: “This helps to engage young people and gives them the best top-ups. Every year, the top-ups diminish, so there is a powerful argument to start pension saving now.”
Most importantly, said McPhail, it encourages people to harnesses compounding. He pointed out that it is difficult for a 55-year old to make a real impact on their pension savings, but starting early can provide a significant boost.
In order to pay for the new allowances, the Treasury could look to cut the annual allowance from £40,000 to £20,000.
However, Steve Webb, director of policy at Royal London, believes policymakers should resist tinkering with the system: “Part of our key message is ‘leave it alone’. The Conservative party said there would be no more changes in this parliament and it needs to enforce that. It’s not that they’re aren’t lots of things that could be changed, but if we keep changing it, who is going to bother with pensions?”
Webb also questioned whether it would incentivise young people, and how it would work with existing defined benefit schemes.
Hargreaves also proposed changes to simplify the Isa regime. It suggested that the Government could consolidate multiple Isa regimes into one ‘super-ISA’, leaving couples with a combined Isa/pension savings allowance of £80,000 a year. Early pensions access and help-to-buy Isa bonuses could be released for first time buyers.
McPhail believes the new proposals would address some of the key problems with the current pensions system: “Those who invest well and build even a half-decent sized pension pot are penalised by the lifetime allowance; higher earners are penalised by the annual allowance taper; meanwhile younger, lower earning workers tend to do worst out of the tax relief system.”
More controversially, particularly for employers who have just set up workplace pension schemes, Hargreaves proposed that firms allow employees to ask for their pension contributions to go into the pension of their choice to avoid disruption when individuals change employer