The Centre for Policy Studies has called on the Treasury to be more radical in reforming pension tax relief by creating a product that would allow pension contributions to be split into separate pots.
Research fellow Michael Johnson has published a paper setting out an alternative approach to pensions and Isa saving following the Government’s consultation on pension tax relief, which closed last month.
Johnson, the architect of the pensions as Isas model, has argued the Treasury should move to a taxed-exempt-exempt model and create an “Isa warehouse”, which would include separate Isa pots earmarked for things like first-time buyer deposits or long-term care.
He says each Isa “cell” would have individually set incentives. Johnson suggests a modest annual allowance, such as £8,000, would be shared between the Isa cells, subject to Treasury modelling confirmation.
Johnson proposes a smaller incentive could accommodate a higher annual allowance.
The Isa warehouse model would work alongside other proposals, including the scrapping of all income tax and national insurance contribution relief on pension contributions, to be replaced by a 50p Government top-up for every post-tax £1 saved.
Johnson suggests employer contributions would be paid into a workplace Isa, with withdrawals not allowed until age 60.
There would also be a lifetime Isa for employees, with the workplace and lifetime Isa sitting within the Isa warehouse.
Johnson says: “‘Drawing on international experience, a ‘Big Bang’ approach is favoured in terms of the transition to a TEE world.
“The primary driver for moving from pensions’ EET framework to the TEE world of Isas is the inflexibility of pension savings prior to 55. This is at odds with how those in Generation Y, in particular, are living their lives. Many eschew pension saving, thereby missing out on tax relief, but engagement with ISAs is high. Ready access and flexibility is valued above tax relief.”
He adds: “A single TEE tax framework for savings would represent a marked simplification of the savings arena.”