Chancellor George Osborne wants the UK to save more for future retirement income. In yesterday’s Budget he outlined “radical plans” to potentially shake how people save for their pensions.
While the plans are still fluid and awaiting consultation, a green paper has been released detailing how the government is looking to shift how tax is paid on pension cash.
Under the current system, contributions to pensions are immune from tax when they are paid into a pot but then taxed when they are paid out to the individual. The proposal involves scrapping pensions tax relief.
While nothing has been decided and the government is still consulting on the suggestion, the proposal would switch this around making it more synonymous with an Individual Savings Account (ISA) tax wrapper.
Osborne (pictured) says increasing longevity and ongoing changes in pension provision provide the right framework to overhaul the system completely.
“As our society continues to age, it will become increasingly important for government to ensure that all individuals are supported to save for their retirement by offering clear, simple and transparent incentives,” he said.
“However, in the context of the deficit and the continuing pressure on the public finances, it will also be important to ensure that this support is sustainable for the longer term.”
The green paper – entitled Strengthening the incentive to save: a consultation on pensions tax relief – asks several questions about the feasibility of the proposed changes and whether there is general support for such moves.
John Warburton, distribution director at pension provider Prudential, backs the change to an ISA-like system.
“We believe the ISA should be the long-term savings vehicle of choice for personal investors. Changes to the lifetime allowance and tax reliefs for higher-rate taxpayers’ pension contributions as well as increased pension flexibilities are already making pensions and ISAs more closely aligned,” he said.
“To continue to signal to personal investors that the government believes the ISA should be the savings vehicle of choice will help give personal investors the clarity, simplicity and confidence they require.”
“We welcome the chancellor’s indication that any reform would be designed to boost savings, particularly among young people and those with insufficient provision for their retirement needs. We look forward to contributing to the debate on how best to incentivise pension saving via the tax system. The implications of potential reform are complex – especially for defined benefit schemes – and, as the Treasury has said, will require careful consultation and analysis.”
Tony Stenning (pictured), head of UK retail at BlackRock, also says the system is ripe for an overhaul as people are not currently saving enough but warns that whatever the result the system “needs to be stable”.
“We welcome the green paper on fundamental changes to the pensions tax regime and believe this consultation provides an opportunity to develop a pensions system that is less complex and incentivises low and average earners to save for the future,” Stenning said.
“This will not be an easy task, as two in five – 44 per cent – haven’t yet started to save for retirement but it’s vital we promote the benefits of saving for retirement and have a stable, simple and trusted framework in which to do it, one which the nation and savers can really get behind.”
However, Jason Whyte, director in insurance at EY, says the proposals could scupper any short-term gains over the longer term and advises caution.
“While harmonising pensions and ISAs on the ISA model would simplify the tax regime, it would mark another huge shift for savers, employers, the pensions industry and the future economy. If it goes through, [Osborne] will receive a huge short-term windfall – unless consumers start saving less. But how much more change can savers take before they lose confidence in the system altogether?” he asked.
“Perhaps most importantly, there could be a risk to the future economy. A generation who save through pension ISAs will pay no further tax once they retire, while making ever increasing demands on the healthcare system.”
“The tax revenue from their contributions will have been long spent. The scale of change contemplated is on a par with the Thatcher government’s reform of the housing market, so it is important that the government is going to consult through a green paper rather than just driving the change through.”
Carlton Hood, customer director at Old Mutual Wealth, meanwhile says it is a huge opportunity but that both experts and individual consumers should not take the proposed changes lightly.
“A full consultation of the future of pensions tax relief is welcome,” he said.
“The green paper on strengthening incentives to save is a once in a lifetime opportunity to develop a regime that helps return Britain to a nation of savers, not spenders. Pension contribution rates are the biggest factor in generating retirement income, therefore the consultation is arguably more significant than any of the reforms we have seen in the last year.”
However, Hood says it is disappointing that the government has decided to pursue plans to curb pension tax relief for high earners, as they may put people off further changes proposed in the green paper.
“The pension landscape has changed massively over the past year and further tweaks around the edges of legislation just puts people off pensions. This is contradictory to the impact the government hopes to achieve with its hreen paper on pensions tax relief,” he said.
Mike Smedley, pensions partner at KPMG, warns that the green paper could lead to complete rewrite of the pension system and that employers may need to broaden out their savings options to employees.
“We are fundamentally positive about any move to encourage the public to save more for their retirement. We welcome the fact that this consultation is taking place at an early stage and that the government is open-minded on the outcome,” he said.
“Whatever the result, there needs to be an incentive in place to encourage people to tie up their money for long periods of time. Incentives for long-term savings need to be better than for short-term savings.”
“If treatment was the same as ISAs it would be a back-door removal of the tax-free lump sum.”
“It’s essential that the individual has certainty about the pensions system. Young savers need to know that their savings won’t be raided by future governments.”
Smedley adds that while a change to an ISA-like tax system would definitely benefit the Treasury, it’s hard to see how it would encourage long-term saving.
“With all of this uncertainty people may not know where to put their money. This savings landscape needs to be clear and simple, otherwise those that want to save may end up thinking the safest place for it would be under the mattress,” he said.
Details of how to respond to the consultation process can be found here.