Britain faces a savings crisis. The long-awaited reforms to tax relief on pensions that George Osborne is due to reveal in the budget must finally start to address that crisis.
The amount that we as a nation save plummeted to a new low of 4.4 per cent of our incomes last year — down from 12 per cent in 2010 and the lowest level for more than 50 years.
The problem is not the £34 billion that the chancellor channels into tax relief on pension contributions, but where that help is directed. Those in the top 1 per cent of the nation’s earners on more than £150,000 enjoy 14 per cent of all pension tax relief, while the bottom 50 per cent of earners account for less than 10 per cent of that support.
So under the chancellor’s skewed system, those on more than £150,000 benefit by 45p of public money for every pound they save, but anyone earning less than £42,386 gets just 20p in tax relief for each pound. It is unjust and an ill-judged use of the nation’s strained finances.
The chancellor should set a flat rate of pension tax relief. It would be simpler, fairer and an important step towards boosting retirement savings. Figures of between 20 and 33 per cent for this rate have been floated. I believe it should be 33 per cent. This would be a welcome boost for basic rate taxpayers and a cut in the savings subsidy for higher earners, while still rewarding savings.
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Then, tax relief could be rebranded as a government-backed saving scheme. For every £2 that savers put towards their pensions, the government would contribute another £1 — a huge incentive to save for everyone.
According to figures from the Pensions Policy Institute, such a change would boost the pension pot of someone on average earnings by between £10,000 and £15,000 over their working lives . Without any extra cost to taxpayers, savings would increase, particularly among those on modest and middle incomes who most need to put more aside.
However, the chancellor must not use these pension changes to put money into the Treasury coffers as he struggles to meet his fiscal targets. That will fool no one.
He should ensure his pension changes are simple, fair and transparent. A flat rate of tax relief set at a level to encourage saving without increasing the burden on taxpayers would help achieve that.
Rachel Reeves, MP, was shadow work and pensions secretary 2013-15