An overwhelming majority of the public want George Osborne to simplify pension saving, with many top earners prepared to sacrifice tax breaks to make the system more straightforward.
Eight out of ten people think a less complicated regime would encourage more to save for old age, according to the first major survey of public opinion since the chancellor announced a review of pension contributions.
However, retirement saving would be badly damaged if Mr Osborne moved to a Isa-style pension system, the survey suggests.
“Investors have made it very clear that they would welcome a simpler system than the present one, but any attempt to scrap up-front saving incentives in an Isa-style system would have catastrophic consequences for pension savers,” said Tom McPhail, head of pensions research at Hargreaves Lansdown, the investment broker that conducted the study.
The chancellor announced in last month’s budget that there would be a three-month consultation on the future of tax relief on pension contributions, which cost the Treasury £35 billion a year, equivalent to about half the deficit this year. More than two thirds of the relief goes to higher and top-rate taxpayers by allowing them to save at least £1 for every 60p they contribute to their pension. Five million high earners benefit by an average of £5,000 a year.
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Mr Osborne said that pensions could be taxed like Isas, meaning that the government would not offer any top-up to saving but pensioners would be allowed to take income from their pot tax-free when they retired.
This would transfer the cost of encouraging saving to future governments, allowing the chancellor to clear the deficit much more quickly.
However, almost half of savers said they would either stop contributing to a pension or reduce their saving if the government introduced an Isa-style system. Only one in five said that it would encourage them to save more.
“People are not willing to lock up their money for retirement on the promise that a future government in 30 years’ time would reward them for it,” Mr McPhail said.
Almost 80 per cent of respondents said the government should simplify the system, with a flat-rate incentive that offered £1 from the government for every £2 put into a pension by far the most popular option.
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Almost six out of ten savers said this system — equivalent to tax relief at 33 per cent — would encourage greater retirement saving.
Two out of five higher-rate taxpayers said they would support tax relief at 33 per cent, even though it would make them worse off. At present everyone who earns more than £42,385 receives tax relief at 40 per cent. Those who earn more than £150,000 receive relief at 45 per cent.
A flat-rate system of £1 from the government for every £2 contributed would be broadly cost neutral to the Treasury compared with the present system, according to the Pensions Policy Institute think tank.
Baroness Altmann, the pensions minister, is understood to favour a single-rate system but the final decision rests with Mr Osborne.
The consultation publishes its findings in October and changes to the pension system could be announced as early as the autumn statement.