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MM leader: The £114bn boon from pensions as Isas

Natalie Holt website

The Treasury has set out four key tests against which any new model of pension taxation should be measured. These are that any reform should: be simple and transparent, encourage individuals to take personal responsibility for retirement saving, build on the success of auto-enrolment, and be sustainable.

It is the last factor that suggests maintaining the status quo is unlikely to be the Treasury’s preferred route. While generous tax breaks for the wealthy are long-held Conservative ideals, the concept does not exactly sit well with the Government’s “long-term fiscal strategy”.

So, to the alternative models on the table. A flat-rate of pension tax relief has the industry’s backing, but if the numbers are anything to go by, not the Government’s.

Morgan Stanley has produced some illuminating research on this, modelling the expected tax take of each option under consideration.

The no change model obviously does not increase cashflows for the Exchequer, so, for the reasons set out above, that one is probably out. Flat-rate is marginally better but arguably negligible in the grand scheme of things, with no upfront tax benefit for the Government and bringing in an extra £7bn to £9bn a year.

And here is where it gets interesting, at least from the policymakers’ point of view. The controversial pensions as Isa idea would generate an additional £12bn to £19bn a year.

But where the maths really gets appealing is in managing the transition from one tax system to another. Money Marketing is hearing whispers of a one-off tax charge to align savers to a TEE system, a so-called pension taxation “big bang”. Talk has apparently turned to introducing this on a voluntary basis, with consumers and providers free to choose this option or not. Morgan Stanley estimates the boost to Treasury coffers of this one-off tax hit to be between £28bn based on 10 per cent take-up, to a whopping £114bn based on 40 per cent take-up. The possibility that anything like that kind of money could flow from insurers to the Government is a prospect likely to make the Treasury bean counters go weak at the knees. The same is true for insurers, but for opposite reasons.

The difficulty with TEE is it is hard to argue that taking away upfront incentives to save will encourage better retirement provision. But one thing is clear: Chancellor George Osborne has form when it comes to uprooting the pensions industry.

As Morgan Stanley points out, Osborne’s penchant for change means radical reform is the least we can expect.

Natalie Holt is editor of Money Marketing. Follow her on Twitter: @Natalie_Holt_MM 


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Fascinating. It immediately makes pension freedoms far easier to manage because there will be no tax to account for so the mythical Lamborghini buyer could withdraw their £150,000 fund all in one go.

    There’s a couple of considerations:
    1. To make people pay up front the Treasury will need to offer a big discount on the tax that the individual would otherwise pay. Again the Chancellor has form here, selling assets at below value to get cash fast.

    2. Has anyone considered what might happen to investment markets if £28bn to £114bn were withdrawn over the course of a couple of years.

    We live in interesting times and change is always good for financial advisers (in the short term at least).

  2. If pensions were taxed as Isas then the pension would no longer exist. Why would you put your money in a pension that is locked away for years when you could invest in an ISA instead and retain access.
    Also, db members and so on would pay heavy tax, so would even people in auto enrolment which would defeat the object of auto enrolment and so on.

    They are prob going to go down the flat rate route instead but would a 40% taxpayer then want to pay tax to lock money away for 30 years? I’m not sure.

    The best thing the government could do is leave things as they are, allow people to use pension funds to ‘offset’ mortgage debt eg if a 40 year old has £100k mortgage and £100k pension he should be able to offset the monies so as to pay no interest on the mortgage. The government should guarantee no pension changes for 30 years to help people plan. Regulatory risk is off putting.

    Then, let things steady and , in time, people will warm to pensions.

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