The next government is being urged to scrap pensions tax relief in favour of a ‘savings bonus’ by the cross-party think tank the Social Market Foundation.
It claims this would save the government up to £10bn, while also delivering a ‘fairer’ pension system that targets government resources on lower earners.
Their latest paper, authored by Michael Johnson, a pensions researcher and former adviser to David Cameron’s Economic Competitiveness Policy Group, calls for both tax relief and national insurance rebates to be scrapped and replaced with a flat 25 per cent savings bonus.
The proposals suggest this could be levied on pension savings of up to £10,000 a year — which would be broadly equivalent to basic-rate tax relief. It also proposes the option of a 50 per cent savings bonus, on up to £2,000 annual contributions, but then capping the 25 per cent savings bonus at a maximum £8,000 contribution. Johnson points out that the vast majority of people make pension contributions of less than £10,000 a year.
This is part of a wide-reaching set of reforms, with a view to simplifying pensions, reduce government spending and making what the authors claim would be a more equitable system.
Johnson is also calling for a larger state pension that is paid later. He is also proposing an ‘auto-drawdown’ decumulation phase. Here, people would receive between 4 and 6 per cent of their total pension pot assets each year from the age of 60 to 75 with the residual amount automatically annuitised at the age of 75. As with AE individual could opt out of these default arrangements.
The paper also voices support for ‘pot for life’ proposals, with members given the right ro choose their own workplace pension scheme. However he also proposes enhancing the AE framework to broaden participation.
The paper points out that the Treasury has provided £44 billion in income tax relief on pensions contributions – which is disproportionally distributed to the wealthy.
He adds that an additional £28 billion was paid out in NICs rebates on employer contributions — which Johnson says are largely invisible to employees and as a result widely unappreciated.
With public finances as constrained as they are, Johnson says both tax-based incentives to be an “ineffective use of scarce Treasury resource” — evidenced by the UK having one of the lowest household savings ratios in the developed world.
Johnson say these proposals to detach the Treasury-funded incentive from tax-paying status would increase the size of most pension pots and would particularly benefit those on low incomes, including non-taxpayers, as well as people with multiple part-time jobs who are predominately women.
The proposal would also save the public purse at least £10 billion each year, as well as providing a radical simplification of individuals’ tax affairs.
He says: “This paper is an attempt to present a pensions framework that considers, as a coherent whole, the three main sources of retirement income; the State Pension, and personal and workplace-derived savings. It pulls together proposals made in 30+ separate papers, written over the last 15 years.
“The framework is intended to be financially sustainable over the long-term, taking into account our ageing population.
It provides for a larger, but later, state pension, accompanied by a safety net, it proposes a more progressive distribution of taxpayer-funded savings incentives, and it complements 2015’s pension freedoms by proposing the introduction of a default process in retirement.
“The envisaged framework builds on the success of automatic enrolment by including both the self-employed and low paid workers, and also reiterates the case for lifetime providers.”
In recent years there have been a number of stumbling blocks to proposals to simplify tax relief. One of the issues has been the problem of industrial action, particularly from higher earners in the public sector – such as doctors and headteachers – who would lose out substantially from such reforms.
There have also been concerns that a later state pension, even if it is more generous could unfairly impact those on working in more manual jobs or from poorer backgrounds who typically have a lower life expectancy.
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