The provider believes the Chancellor is gravitating towards reforming tax relief to a basic rate (20%), with tax-free withdrawals, and says there are a number of reasons why this proposed solution is likely to "run into difficulties".
Hargreaves Lansdown said:
"Investors don’t trust politicians not to muck around with the pension system, with good reason. An ISA style reform with tax relief being scrapped in favour of tax free withdrawals would create the risk of a future Northern Rock style run on the pension system and the UK stock-market. Any hint of political interference in the future could result in billions of pounds being withdrawn overnight; it would be hugely unstable.
"The offer of a 20% top up, with tax free withdrawals looks superficially attractive, however any change to pension taxation will involve cuts to the tax relief available. This is likely to be particularly bad news for anyone who becomes a higher rate taxpayer towards the end of their working careers when they are most able to catch up on their pension funding. It would mean cutting the Annual Allowance very substantially, probably down to around £10,000. It would therefore become extremely difficult for mid to high earners to build a decent retirement pot over their working lives."
For a higher earner, it would mean exchanging 40% relief on £40,000 for 20% relief on £10,000; a loss of £14,000, in exchange for a "paper promise from a politician which would depend on a future government for its honouring", according to the firm.
As a result, Hargreaves Lansdown anticipates that mid to high earners are likely to look increasingly towards more esoteric investments such as VCTs, resulting in higher risk-taking, and that employers may cut back on their workplace pension funding.
