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Flat rate tax relief would result in pension ‘exodus’

Paloma Kubiak
Written By:
Paloma Kubiak

A third of people would switch their savings from a pension to an ISA if the Chancellor introduced a flat rate of pension tax relief, a study has found.

George Osborne is widely expected to dramatically overhaul the pension tax relief system by implementing a flat-rate during this year’s Budget on 16 March. This would mean everybody would qualify for the same base rate of relief, regardless of earnings.

The survey of 2,000 savers by online investment site True Potential Investor found that cutting the tax relief would lead to a pensions “exodus” in favour of ISAs.

Twice as many over 55s would favour an ISA versus a pension after a tax relief cut. Of those aged 18-24 who are starting to save, 43% would put more into an ISA versus 32% who would stick with a pension.

Just one in five would continue to save into a pension at the same level if the higher rate tax relief was cut.

Others said they would choose alternative investments, such as property.

The Chancellor is expected to end the 40% and 45% pension tax relief rates at next month’s Budget following a review into tax relief last year.

Currently, if you’re a basic rate taxpayer the government will give you £20 for every £80 you put into your pot. If you’re a higher rate taxpayer earning over £42,385, the government contributes £40 for every £60 you contribute. If you’re an additional/top rate taxpayer, you pay £55 and the tax relief is £45.

But a flat rate of tax relief, closer to the 20% mark has been suggested for all pension savers.

Impact of flat rate pension tax relief 

If the flat rate of pension tax relief goes ahead, True Potential Investor said 18-24 year olds on a salary of £43,000, paying a £310 monthly pension contribution would potentially miss out on £55,000 in tax relief.

For those aged 35-44 on a £43,000 salary making a £384 monthly pension contribution, they’d miss out on a potential £44,000 tax relief if higher rate is cut.

Key incentive is pension tax relief

“Pensions are deeply unpopular, poorly understood and deny people access to their own money for decades. The only reason for choosing a pension is tax relief, which if cut, would dramatically reduce the appeal,” said David Harrison, managing partner at True Potential.