Blog: Is this the beginning of the end for tax relief?

Will the government's tough love on pension reform mean fewer incentives to save?

Plans for a universal state pension signify the end of government provision as the main source of retirement income. It sets in stone the principle that the State provides a basic payment only; it cannot be increased according to need.

Effectively, the government is employing tough love and saying the next generation of pensioners will have to stand on their own two feet.

Getting tough on pensions is a theme for this government. At the same time as allowing more freedom, with the end of compulsory annuitisation, the government could be planning to remove the incentives to save.

In short, the government is forcing people to save for its own merit rather than proffering free money in the form of tax relief.

Could tax relief ever be done away with though? From the most basic saver putting a few hundred a year into an ISA, to a city slicker looking for an efficient way to squirrel away that last £50,000, tax relief has been a universally lauded way to make thousands save for the future.

But there are signs it could be drastically reduced. Osborne announced in his budget speech the government would look into merging National Insurance and income tax.

The details of how this would work will emerge later, but Skandia takes the view this would create a basic rate of 32%, or a higher earner rate of 42%.

This, the provider says, could lead to tax relief needing an update so basic rate tax relief would have to be upped to 32%.

That's not very affordable, Skandia says, so would the government have to cap tax relief to 32% for everyone, balancing the lower earners' gain with the higher earners' loss? It certainly would be cheaper and simpler, but not very popular.

At the same time, Osborne declared the 50% tax rate is a temporary measure and it will be reduced as soon as possible.

This means higher rate tax payers currently eligible for 50% tax relief on their savings could soon see their pension pots swallowed up if the rate, and with it the tax relief, reduces.

Meanwhile, sitting in the corner is the spectre of compulsion. Auto-enrolment is the last resort for encouraging pension saving, particularly for lower-earners who need more convincing, because tax relief has failed as an incentive.

In Australia, where employers are compelled to pay a percentage of workers' pay into pensions, there is no tax relief on savings. So if the coalition's nudge method matures into compulsion, will the government do away with tax relief altogether in the future?