In the run up the Budget, chancellor Philip Hammond is said to be considering a cut to pension tax relief for older workers to fund a cut in national insurance for younger workers.
If the government decides to go down that route, it might scrap higher rate relief after a certain age for those earning over £45,000.
The total cost of providing pension tax relief has exceeded £50 billion for the first time, according to Tilney. And the bulk of the tax relief (circa 70 per cent) goes to higher or additional rate taxpayers.
Gary Smith, chartered financial planner at Tilney, says: ‘Ultimately, I do feel that changes to the pension tax relief system are inevitable at some point, but there are other ways to achieve this without penalising older savers in favour of young people.
‘For example, the introduction of a flat rate of relief for all at 25 or 30 per cent would provide an additional boost to contributions for basic rate taxpayers, and while pensions would no longer be as generous for higher rate taxpayers, their funds could still end up being boosted if all of the relief was paid into the pension, rather than partly through a reduced tax bill.’
According to calculations by AJ Bell, if tax-relief is limited to 20 per cent from age 40, a higher-rate taxpayer paying £500 a month into a pension could miss out on £65,000 in savings bonuses by the time they reach 65, while someone setting aside £2,000 a month could end up with retirement savings worth £250,000 less.
Tom Selby, senior analyst at AJ Bell, comments: ‘While it would be relatively simple to restrict higher rate taxpayers from reclaiming additional relief via their tax return at a certain age, changes would need to be introduced to catch employer pension contributions, including salary sacrifice arrangements, so that they can’t be used to circumvent the new rules.’
But there would be inevitable anomalies: ‘How do you justify cutting pension tax relief for a doctor earning £60,000 in order to provide a tax boost for a City worker earning £500,000?’ However, it's hard to make a call on how likely this scenario would be without figures on the relative proportions of younger people and older people who are higher earners.
Previously, an inquiry into intergenerational fairness has shown that younger generations are increasingly worse off than older generations who have benefited from free higher education, accelerating house prices and final salary pensions. In addition to that younger generations have arguably been disproportionately hit by the financial crisis and the government's austerity agenda.
But while younger voters are likely to welcome this proposal, older voters still hold the key to the Conservatives’ electoral success; any Tory proposal to decrease their pension tax relief is likely to alienate them.
Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now