The Government has recently finished a consultation looking at how pension taxation could work in the future. The Chancellor, George Osborne, has said that he expects to reveal the findings and the direction he is going to take during the March Budget. But is there any way to take an advance look at the situation? What has the Chancellor considered and what might his decision be in March?
Whilst there are no certainties in this situation, Scottish Widows in particular has identified a number of key ingredients it believes could make the system successful. These ideas may well have made it into consultation responses, so it’s this sort of thing that the Chancellor may well be debating over, as we type!
Employers must remain positively incentivised to play a central role. Employers account for 80% of savings in our pension system (excluding the State Pension), where National Insurance Contribution (NIC) relief encourages employers to be much more generous than the law requires and often also encourages employees to save more in order to unlock higher levels of employer contribution.
A pension should offer a superior return compared to any alternatives. Under any new system there will be winners and losers relative to the current system. However, this is largely irrelevant once the old system has gone. Whether or not an individual will put money away over the long term for retirement depends on the extent to which it is more beneficial to do so over other savings options available to them (including ISAs or buy to let property.)
Incentives should apply to both the employed and the self employed. Whilst statutory employer contributions now make workplace pensions attractive to most employees, there is less incentive for the self employed, who make up 15% of the working population. A modern system should provide similar incentives to the self employed.
Tax relief should be promoted and appreciated. Research from Scottish Widows showed that only 15% of people fully understand the current pension tax system. People in ‘net pay’ arrangements have the least understanding with many unaware of any tax relief applying at all. Moving all schemes and products to operate on a ‘Relief At Source’ type basis would make relief more visible and a re-branding of tax relief to say a ‘Government Incentive’ could assist in more effective promotion and increased appreciation.
A simple message that applies to everyone. With ISAs, it doesn’t matter who you are, there is a simple annual allowance that applies to everyone, every year. In pensions, the complex interaction between annual allowances, lifetime allowances and tapers, prevent Government, employers and the pensions industry from effectively promoting a simple message which applies universally.
The system should encourage people to behave responsibly at retirement. The current tax arrangements act as a braking mechanism which prevent people taking all of their pension pot early and spending it too quickly. When people spend their pension pots too quickly it places additional pressure on taxpayers to sustain them in later retirement and therefore any new system needs to consider an appropriate braking mechanism.
Provide assurance against double taxation. Individuals will be wary of saving through a vehicle where they could bear tax on the same money more than once. This could be the case at an individual level where an individual’s marginal rate of tax changes between the stages of accumulation and retirement. A carefully designed system will address this potential issue. There is also a concern that a future Government could be forced to tax retirement savings in times of economic necessity, although this could be addressed by assuring savers that in such extreme circumstances, pension assets would be no more at risk from taxation than any other form of savings.