Pension taxes were in the news again this week, with a high-profile report suggesting swingeing changes are needed to make the system fairer to young people.
The Resolution Foundation think tank, via a body it has created called the Intergenerational Commission, has proposed the changes as part of a whole array of social policies it says are needed to level the playing field between the generations.
I looked at two of its other proposals - for a £10,000 gift to 25-year-olds and an overhaul of Inheritance Tax - in an article earlier this week, while Fidelity’s Tom Stevenson and I discussed them in this week’s MoneyTalk podcast.
In terms of pensions, its proposals are no less radical. It suggests introducing a flat-rate of tax relief on pension contributions, limiting the tax-free lump sums drawn at retirement to £40,000 and introducing a National Insurance charge for those working over the state pension age and those taking an income from an occupational pension.
It also puts forward a host of other tweaks to the system concerning self-employed people, state pension age and the auto-enrolment system.
Now, these are not small changes. The idea of a flat-rate of income tax has been around for a while - the Foundation suggests a level of 28% relief - but has never got off the ground despite many respected experts agreeing that the change makes sense. It would remove the perverse outcome of the highest earners being given the biggest incentive to save into a pension, rather than lower earners who face the most financial jeopardy from not saving.
Whatever its merits, the consensus appears to be that the change would be too politically damaging, alienating middle-class voters who do well from the current system.
Similar barriers exist to the other suggested measures. Making pensioners pay National Insurance on their income - the Foundation suggests the rate for those living from an occupational pension would be lower at first, and with a higher starting threshold - would go down exceedingly badly with old people, who have a habit of turning out in great numbers to vote in their financial interests at elections.
The £40,000 cap on tax-free cash would, too, upend one of the few popular features of our very complicated pension system and would be welcomed by no one outside of the Treasury.
Given all of this, why have these proposals been getting as much attention as they have? Why am I bothering to tell you about them?
The answer is that we may well look back on the Resolution Foundation’s work as the start of a long (maybe very long) road to significant reform of the pension and tax system. The Resolution Foundation’s raft of proposals - there are 38 ideas in total - are aimed at solving very real, and growing, imbalances between the outcomes for older and younger people under the current system.
These problems will become more acute as the years pass, and the pressure to act, however unpopular the action - will grow.
It’s a good reminder to make the most of the system as it stands today.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Combining your pensions into a SIPP can make it easier to manage your savings - and it could be cheaper, with lower service fees than you’re currently paying.