The Treasury should scrap annual higher rate tax relief on pensions, worth £7bn, as it is skewed towards the wealthy and does little to encourage younger workers to save for retirement, a pensions analyst said.
The “radical overhaul” is one of many proposals put forward by Michael Johnson, a pensions analyst writing for the Centre for Policy Studies, to reform the “failed” financial incentives currently in place to encourage saving for old age.
In a paper published on Monday, Mr Johnson calculates that over the last decade, the Government has given tax relief worth £358.6bn on employer and employee pension contributions, as well as relief on income tax and NI, in an attempt to encourage saving.
But Mr Johnson claims the spend which last year hit £39.1bn, the value of the UK defence budget is “misguided and ineffectual” as it does not encourage a savings culture.
The expert said higher rate tax relief is a cost to the state not an investment and should be terminated.
Meanwhile, however, pensions are still proving far more popular for companies and staff than save as you earn schemes, which allow employees to invest in their company at a discounted price.
According to UHY Hacker Young, the accountants, the number of companies offering SAYE schemes plummeted 15pc in the last year, despite Nick Clegg’s repeated calls for increased employee share ownership.
The schemes have withered thanks to corporate cost-cutting and the removal of key incentives for workers to use the scheme by HMRC, according to UHY Hacker Young.
Roy Maugham, tax partner at the accountancy, said: “The Government is supposed to be encouraging employee ownership, but these figures show one of the key avenues to employee ownership is rapidly withering.
“SAYE schemes have historically been one of the best ways to encourage employees to invest in their employer. SAYE schemes can make investments both cheap and financially rewarding.”
Elsewhere, research by PriceWaterhouseCoopers showed gold-plated pension schemes still pose a risk to companies, with the new “economic reality” of low interest rates and high inflation making it unlikely that deficits will improve.
The accountancy warns that companies may need to pay more, or for longer, into their final salary schemes, rather than rely on investment returns, to make good the deficit.