On the go: Former pensions minister Baroness Ros Altmann suggested the government could make the legal minimum auto-enrolment contributions compulsory and remove tax relief from this amount.
Baroness Altmann said this would be a solution to limit the tax relief expenditure, as she called on the government to reform the current system, suggesting that a new approach could raise revenues and improve pension outcomes for low earners.
Currently, the minimum contribution rate is 8 per cent, made up of 3 per cent from the employer, 4 per cent from the employee and 1 per cent from tax relief.
“The extra money put into workers’ pensions from the 3 per cent employer contribution is much more than the 1 per cent from tax relief,” Baroness Altmann said.
“As the ‘free money’ added by employers dwarfs the impact of tax relief, the billions of pounds spent on auto-enrolment by taxpayers seems poorly targeted.
“Compulsory employer and employee contributions would eliminate the need for taxpayer incentives and could be a timely revenue-raising reform.”
She added: “Government incentives would then only be added to contributions beyond the minimum, and could be more generous for average earners than the current system, in order to encourage more people to build above the minimum and drive better overall retirement provision.”
In its manifesto, the Conservative government promised that within 30 days of being elected it would address the problems caused by the tapered annual allowance, but Baroness Altmann suggested that radical reforms to the pensions tax relief system may be better suited to fix this issue as it could also save money.
She said reforming the system, which costs the government £50bn each year, could also help to solve the National Health Service pensions crisis, where complex tax rules have forced senior clinicians to pull out of the pension scheme and cut down their work hours.
