Pension Minister Steve Webb has dropped a heavy hint that pension contribution tax relief faces a shake-up if the Lib Dems are still in power after the next election.
Rumours have floated around The Treasury and back-rooms at Westminster over recent months that the top-up cash paid to retirement savers when they put money into their pension is at risk.
Until now, no senior government figure has stepped forward to support or deny the rumours as each party fears including proposals to scrap the relief would be a vote loser at the polls in May 2015.
However, Steve Webb indicated that changes are on the way in his speech to the Lib Dem conference in Glasgow.
He told his partisan audience: “The current system of tax relief on pensions is riddled with inequity.
Balancing out unfairness
“As a higher rate tax payer, if I want to save £1 in my pension, I only have to pay in 60 pence and the taxpayer contributes the rest.
“But someone earning less and paying tax at the basic rate has to pay in 80p with the taxpayer putting 20p towards that to make up the £1. That cannot be fair.”
Webb explained the government spends £37 billion a year on tax relief on pension contributions, with the largest share of the cash going to those who earn the most.
“My thinking is pension relief could be reviewed with the focus on paying less overall,” he said. “The saving could go towards paying down the deficit and everyone contributing to a pension would receive the same amount of relief.
“This needs working through, but I believe the next government will have to look at balancing out this unfairness.”
At the same time, politicians on all sides of the house are also looking at further pension tinkering.
LTA under threat
The other major target is the lifetime pension allowance, which is the maximum retirement savings an individual can make.
The current limit is £1.25 million, down from £1.5 million a year or so ago. Now, politicians are considering dropping the limit to £1 million.
Anyone whose life savings bust the cap faces a 55% tax charge on the cash above the limit.
The danger for a successful investor is not that they put too much cash into their pension, but that the underlying investments perform so well that they creep over the limit.
That leaves a successful investor penalised for picking the best yielding equities and funds.
