He said: “Clearly the main focus here needs to be on ensuring all workers receive the pension tax relief they are entitled to, although policymakers will likely also be mindful of avoiding layering extra burdens on employers currently operating net pay schemes for auto-enrolment.”
But Pete Glancy, head of policy at Scottish Widows, said it would be a difficult issue to solve.
Glancy said: "While this might sound relatively simple, the implications for pension schemes operating on a ‘net pay’ basis would be quite significant and potentially insurmountable.
"For example, would the payroll industry have to evolve to calculate ‘semi-gross’ contributions for higher earners, or would contributions continue on a ‘gross’ basis with HMRC having to recover overpaid tax relief from millions of people?
“The implications could involve moving all pension schemes to ‘relief at source’ and that could take several years to implement, plus the challenge of ironing out ‘double taxation’.
" In the UK, the principle is that no-one should pay tax on the same pound twice, so if higher earners have only benefited from relief at 20% when the money went into their pension pot – but their overall income in retirement means that their marginal rate of relief is higher – this would breach that principle.”
Another issue is emergency tax rules when savers withdraw funds from their pensions.
Andrew Tully, technical director at Canada Life, said: “Many individuals who make a lump sum withdrawal from their pension initially receive a lower amount than expected due to HMRC imposing emergency tax.
“While the individuals can reclaim this overpaid tax, it isn’t simple for people to understand, and means people may take a further withdrawal from their pension when they simply don’t need to.”
Selby said to give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC.
In the same year, more than 600,000 people flexibly accessed their retirement pot for the first time.
“While those who took a regular income should have had their tax code adjusted automatically, anyone who didn’t will have been overtaxed,” he said.
IHT reform
The OTS has published two reports making recommendations aimed at simplifying IHT including around gifts, while a group of MPs has also published a paper with more radical proposals calling for a complete overhaul of IHT.
This could include bringing death benefits from pensions into scope of IHT.
But Cameron said this would be at the “extreme end of the spectrum” and would come with a “multitude of knock-on consequences” going against the pension policy objectives of encouraging people to save adequately for retirement.
Cameron said: “Death benefits from pensions are currently typically paid at the discretion of trustees or scheme administrators and are free of IHT.
