Higher earners have likely benefited from chancellor George Osborne's decision last week to push back any pension tax changes, but the majority of earners are now missing out, a report released today argues.
According to the research by the Resolution Foundation, if Osborne had unveiled a flat rate of relief of 30 per cent at next week's Budget, a 30-year-old on an average salary who is saving at the rates required under auto-enrolment would have seen a boost of £11,200, or 13 per cent, in their pension pot by the time they reached retirement.
On the other hand, somebody bringing home £60,000 a year would have missed out on £22,000, a fall of 14 per cent.
Meanwhile, a pensions Isa – which would see contributions to pensions be taxed but withdraws become tax-exempt – could have increased the average worker's pensions savings by 26 per cent, or £21,400, but it would have decreased the higher-paid worker's by 12 per cent, or £19,700.
"The chancellor was right to look at changes to pension tax relief, which is very expensive and disproportionately benefits higher earners," said Adam Corlett, economic analyst at the Resolution Foundation. "The savings challenge our country faces is to boost the retirement incomes of low-income households – not give tax breaks to high earners – and that should be the priority for reform."
The report states that the current pensions system is setting government back just less than £35bn a year, while the top one per cent of taxpayers rake in 13 per cent of total tax relief, making the argument for reform very strong.
Corlett added: "The current political climate may have postponed the chancellor’s plans to overhaul pension saving. But with the reforms having the potential to significantly improve the retirement prospects of the majority of workers it’s an issue that he should return to."
A Treasury spokesperson said: "The government has always encouraged people to save and plan ahead for later life. Our consultation on pensions tax relief was about how the system was working and we have always been clear that this involved looking at all the options, including keeping the current system."