‘Simply Saving’ plan to slash pension tax relief would save Govt £10bn
4 September 2018
Pension tax relief reforms put forward by a leading think tank could increase distrust and complicate the pensions system, industry commentators have warned.
The Centre for Policy Studies has proposed abolishing tax relief on pensions and replacing it with bonuses on individual and employer retirement savings contributions and a Workplace ISA.
In its “Five Proposals to Simply Saving” paper, the think tank says Britain’s household savings ratio has plummeted to below 5%, the lowest since records began in 1963, with the top 1% of earners receiving double the pensions tax relief of half the working population. As a result, it has called for a series of reforms to be introduced.
In addition to scrapping pension tax relief, the report suggested introducing what it calls “a generous cap” on the total bonus any individual can receive in one year; reform of auto-enrolment to scrap the minimum earnings threshold; replacing NICs rebates with bonuses on employer’s contributions paid directly to an employee’s personal account and introduction of a workplace ISA to house employer’s contributions, locked in until age 60.
The report, which came in response to the government’s recent announcement of a review into pension tax relief, says its proposals would save the Treasury an estimated £10 billion a year.
Robert Colvile, director, Centre for Policy Studies, said: “The pensions savings landscape is complex and many people are put off from adequately preparing for their retirement. It is vital that reforms are made so that people can access financial products which suit their needs today, and in the future.”
However, response from industry commentators has warned that further changes to the pension system will cause greater distrust among savers.
In response to the proposals, Jessica List, pension technical manager, Curtis Bank, said: “The paper talks about mistrust in pensions, but does not mention that one of the reasons most commonly cited for this is frequent, large-scale changes to the pension rules. Fundamental changes, such as overhauling tax relief, would need very careful introductions to avoid creating further mistrust.”
List said that rather than move to a new system, which would also run the risk of being poorly understood, it would be more effective to try and simplify the current system and make it clearer for savers.
Steven Cameron, pensions director, Aegon, also warned that an attempt to demolish the current system would create decades of turmoil for savers and new political risks with little guarantee of an improvement in the overall savings landscape.
He commented: “Reframing pensions tax relief as a government top up has many presentational advantages and moving to a single top-up rate somewhere between basic and higher rate taxes would be fairer to lower earners.
“However, the underlying intention behind these proposals is another attempt to replace pensions with ISAs. The problem is no one can stop politicians of the future introducing new taxes on proceeds, so a pension ISA is much more risky than the current pension system under which tax relief is granted and locked in upfront.”
Martin Tilley, director of technical services, Dentons Pension Management, said: “There is no denying we have some fundamental issues to address when encouraging people to engage with pensions, but I am not convinced that the move from EET to TEE* will present a more understandable proposition.
“There are currently multiple ISA offerings and adding another could become equally as baffling as the current pension options. To add to the confusion, there doesn’t appear to be any consideration given to how the proposed system would impact on current DB schemes.”
Tilley pointed out that while it’s clear more needs to be done to simplify consumer understanding of pensions, adding more products is not the way to go about it and added that this would only give people more reason to believe that the pensions they are investing in today may not be the same when it comes to their retirement.
* Exempt-when investing, Exempt-when accumulating, Taxed on withdrawal (e.g. how pensions tax currently works); Taxed when investing, Exempt when accumulating, Exempt on withdrawal (how an ISA is taxed).
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