Cut tax relief for 60% state pension boost: Johnson

Speaking at the Friends Life Global Forum on Wednesday, Johnson - a research fellow at the Centre for Policy Studies - described the £29bn acquired from pensions tax relief as the "juiciest, lowest-hanging piece of fruit in the wood" for the Treasury.

However, he said the Treasury has yet to really examine whether there are savings opportunities.

Johnson said: "What is tax relief for other than an inducement to save in a pensions framework? If it is really to encourage people to save a reduce pensions poverty then why not take that £29bn a year and add it to the £51bn a year we spend on the state pension - and therefore increase it by about 60%."

He added: "This would do a lot to address pensioner poverty in a very simple way."

However, Johnson accepted this approach compromised the incentive for both employers and employees to save into a pension scheme because within that £29bn, roughly £8m to £9m is employer National Insurance rebates and it is also "inequitably distributed towards the wealthy".

Johnson proposed a 20% tax rate for everyone, irrespective of earnings, would save about £7bn a year.

"Why not cap pensioner income tax at 20% as that would retain the interest of 40% and 50% tax payers within the pension product?" he said.

Johnson went further saying adopting the ISA tax framework - whereby initial contributions are out of post tax income; growth of assets and dividends are exempt from tax; and assets drawn down are also exempt - rather than the EET used for pensions would save the Treasury about £12bn a year.

He said: "The downside is you remove the upfront incentive to save for the long term but you could argue so many people are unaware of the value of tax relief anyway and so many people put funds into ISAs anyway - about £45bn last year - that maybe that is not such a big barrier."

He added Chancellor George Osborne has little left other than to address upfront tax relief, having already proposed increasing public sector member contributions and potentially abolishing contracting out for final salary schemes.

PP first revealed Johnson's radical up-front tax relief proposals last year (PP Online, May 13).