The UK Government is right to "tread extremely carefully" over the prospect of radical pension tax relief reform in its response to recommendations from the Treasury Committee, AJ Bell argues in a response statement on 3 June.
The Treasury Committee's ‘Tax after Coronavirus' report had suggested the Chancellor should "urgently reform the entire approach to pension tax relief" due to its "regressive nature".
However, in response, Treasury minister Jesse Norman warned radical tax relief reform could have "far-reaching consequences' and would require "careful consideration".
At a time when automatic enrolment is sowing the seeds of a pensions recovery in the UK, attacking pension tax relief would be a retrograde step.”
Tom Selby, senior analyst at AJ Bell, said: "In the context of a global pandemic which has seen the Government forced to directly pay the wages of millions of people - wracking up hundreds of billions in extra debt in the process - all areas of spending, including incentivising retirement saving, were bound to come under scrutiny.
"However, radical reform such as scrapping higher-rate pension tax relief would have profound consequences and the Treasury is right to tread extremely carefully.
"If the Government were to opt for a flat rate of pension tax relief set at 20%, policymakers would need to figure out how to apply this single rate of pension tax relief to defined benefit schemes - including those of the NHS and the wider public sector.
He added: "This would inevitably lead to NHS staff and others facing shock tax bills as a result - a tough sell at the best of times, let alone after one of the most brutal years health workers have ever experienced.
"It would also have significant implications for retirement saving more broadly. At a time when automatic enrolment is sowing the seeds of a pensions recovery in the UK, attacking pension tax relief would be a retrograde step."