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Thinktank calls on govt to scrap pension tax relief

A thinktank has called on the government to scrap pensions tax relief and replace it with bonuses on contributions.

In a paper by Michael Johnson from the influential thinktank The Centre for Policy Studies, he says that the government should use a review into pensions tax relief to reform the system and broaden Britain’s savings

In June Departerment for Work and Pensions minister Baroness Buscombe said the government will examine concerns low-paid workers in net pay schemes are losing out in the current tax relief system.

In a response to the review published today,  Johnson sets out five main proposals to broaden the country’s savings base and save the Treasury money.

In his report called Five Proposals to Simplify Saving, Johnson argues tax relief on pensions should be abolished and replaced with explicit bonuses on individual and employer retirement savings contributions.

He says these bonuses would not be connected to tax-paying status and also advocates the introduction of a cap on the total bonus any individual can receive in one year.

Other reforms proposed include scrapping the minimum earnings threshold for auto-enrolment and the replacement of national insurance contribution rebates with bonuses on employers’ contributions, paid directly into the employee’s personal accounts.

The final proposal is to introduce a workplace Isa to house employers’ contributions, locked in until age 60.

Johnson notes Britain’s household savings ratio has plummeted to 4.9 per cent, the lowest since records began in 1963.

He says the current system of tax relief is incomprehensible to the general public and costs the government billions each year.

He adds 68 per cent of it flows to higher and additional rate taxpayers who do not need such a large incentive to save.

Reacting to the report Aegon pensions director Steven Cameron says: “Individuals would ideally save for the future through both pensions and Isas.

“An attempt to demolish the current pensions system which serves millions of people, replacing it with yet more Isas, would create decades of turmoil for savers, new political risks around taxes on future savings proceeds and no guarantee of any improvement in the overall savings landscape.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Of course these ideas are usually put forward by those in gold plated Defined Benefit schemes, often taxpayer funded.

    Where is the incentive for the self employed like me, no employer contributions and no tax relief? SEIS/EIS and VCT work for those who can take the risk, but not for everyone.

  2. An interesting concept of simplification – replacing simple tax relief with a bonus but the bonus would be capped and a new ISA (the obvious solution to every problem, it seems). The impetus behind this is the fall in the household savings ratio – albeit that pretty well every time the savings ratio is announced, it is subsequently revised, usually upwards. Nor should we forget that the savings rate is influenced by borrowing, so as borrowing goes up, the savings rate tends to go down. Maybe more saving would be done if people borrowed less.

    The assumption in the paper is that it is pension complexity that puts people off saving, though there is no evidence of that. Others might suggest that people prefer to spend and borrow today rather than save for an uncertain future. (And some of that borrowing, to finance house purchase, may be viewed by some as a form of “pension saving”.)

    He says in the paper that these changes would “help incentivise mass savings” – a statement of faith without any evidence – and “save the Treasury an estimated £10 billion a year” – ah, perhaps that is the real point behind this…

  3. Heaven forbid… yet another proposal to change pensions in some way.. when will they just stop tinkering with them? How on earth are the public every going to have faith in the fundamental principle of pension planning when they are forever changing things..

  4. These academics are so out of touch it’s painful. Perhaps before coming out with these prognostications they should consult a psychologist.

    People (all people) dislike paying tax. If they think that by contributing to a pension they will pay less tax that is an unbeatable incentive. Indeed the CRAP should be scrapped. (Contributions relief at payment) and instead the old system should be reinstated so that people can see precisely how much tax they can save.

    Paying a bonus is merely a pleasure deferred and doesn’t match getting one over on the taxman and money in your pocket now. Plain psychology. Get rid of the tax relief and see pensions wither even further.

  5. Makes some sense if the LTA is also abolished

  6. John Hutton-Attenborough 28th August 2018 at 9:13 am

    Harry. Spot on. I also consider that the lack of advisers is part of the problem. Banks say “No” and no “Home service” providers to deal with the masses. The “man from the Pru” served a purpose and helped to deliver a savings ratio of around 10%. Not perfect in a lot of ways but in “those” days there was a savings culture from top to bottom!

  7. The current problem is the review of tax relief is primarily considered by the Treasury as a revenue raising measure. This means that any review is not considering the best options but those which provide short term income results.

    On bonuses can we trust a future government to honour them at current rates once disconnected from tax or will they be eroded away in future years for expediency.

    There are lots of issues which would need to be addressed.

    1. Higher rate taxpayers receive a larger proportion because they pay the most tax. Lower earners receive proportionately less because they can pay very little. How would this work out with say the self employed who spend may years creating a successful business and only in their late careers can afford to pay significant amounts into their pensions to catch up the years when this simply wasn’t possible(this obviously could also apply to the employed without a final salary/DB pension who may similarly only have disposable capital in their later years).

    2. If ISAs are the answer the problem is that the tax take from the retired under their proposals will decline into the future just when cash is needed for an aging population.

    3. The 50% relief on smaller contributions is a good call and one which should be implemented immediately.

    4. Ready access to savings may be what clients want, but in many cases this could lead to the reason for encouraging retirement savings not being addressed.

    5. How would this work in the world of Final Salary schemes prevalent now mainly in the public sector.

    Good to see the debate out there but not sure this is the answer.

  8. Trevor Harrington 28th August 2018 at 10:18 am

    Some reality :

    We do not have any money.

    Like all western governments (apart from Germany), we are not alone in the fact that we do not have any spare or surplus money in our tax revenues, in fact we are still spending more that that which is coming in (budget deficit). Indeed, like all western governments including Germany, we have huge and debilitating national debts which require commensurately huge levels of public funding (funding which otherwise could be spent on other projects, like tax relief on pension contributions if you wish, or indeed the NHS if you prefer).

    So … whilst we can all come up with excellent ideas of perfectly justifiable, and eminently socially correct ways by which we can spend money, until you find a way of yielding that money from current expenditure (ie take it off someone else), then you may as well whistle.

    Abolishing tax relief on pension contributions altogether, would be draconian, but reducing it to a common rate of Basic Rate income Tax relief only (20%), would be perfectly justifiable and very socially acceptable.

    The issue is that huge pensions for large salary earners are completely and utterly unjustifiable in their own right, particular where they have been funded by the rest of us through huge employer contributions (not just the Public Sector – all of them ?). The fact that they have also had higher rates of income tax relief on their personal contributions is not only unfair, but it is socially reprehensible.

    The LTA is there for a reason – that reason being to try and restrict the “gravy train” of huge and unjustifiable pension awards, much of which have been funded by the rest of us through enormous tax reliefs, and at the detriment of socially correct spending, such as the higher education, The NHS, support for the aged, long term care, the Defense Budget, and of course the provision of our state pensions at a sensible amount and a sensible age.

    Indeed, such is the need to curtail the above inequalities of these huge and massively excessive pension accumulations of the past, that the LTA could well be extended, to include a super rate of income tax, on all pensions in payment in excess of say £40,000 or £50,000 per annum (£50,000 x 20 = £1,000,000 sounds familiar?).

    I for one, would be very happy to see that extension of the LTA, particularly if the savings to public expenditure were then spent on bringing our state pension back to a reasonable age of perhaps 60, and a living wage of perhaps £200 per week.

  9. Here we go again!

  10. I think Steve Cameron’s observation in the final paragraph of this article sums up pretty well the most likely outcome of this proposal.

    The barmy ideas put forward by trouble-makers like Johnson and, in his particular field, Mick McAteer are menaces to society. The very last thing we need is yet more messing about with pensions, public confidence in which is already at an all time low. How anyone other than a complete nutcase can possibly believe that scrapping tax relief and replacing it with some cackhanded bonus system will “simplify saving” beggars belief.

  11. IF anyone has lost faith in pensions, might have the politicians constant tinkering with them have something to do with it?

    Tax relief has also only become complicated because politicians keep tinkering.

    In simple terms, they want to rape people’s savings for more money, because even though the government is Tory, they are hooked on stealing more and more from the tax payer because they believe they know best.

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