Flipping the pension tax relief system on its head so people are taxed on contributions, rather than withdrawals, could pose “considerable risk” to saving in the UK, Royal London chief executive Phil Loney warns.
The Conservative Government published a green paper alongside the first Budget of this Parliament setting out options for reform of pension tax relief.
In his Budget speech Chancellor George Osborne said he was “open to further radical change”, adding that “pensions could be like Isas – you pay in from taxed income and it is tax-free when you take it out and in between it receives a top-up from the Government”.
However, Loney says such a move could discourage people from saving into a pension.
He says: “This so called ‘Isa-style’ tax treatment of pension contributions is a fundamental and far-reaching change to the principles of pension savings, which could pose considerable risk to the Government’s aim of creating a savings culture in the UK.
“There is no evidence that the promise of tax-free income, 25-30 years into the future, would be believed by the public given the volume of changes to the pensions system over the last 25 years.
“Consequently, there is a real risk of a significant fall in savings, which are already too low in the UK. It would also create a parallel system which is wholly incompatible with people’s existing pension arrangements, would take years to develop and would increase the overall cost of pensions. “
Loney says reforms to tax relief should focus on making saving “fiscally neutral for all”.
He adds: “The incentives need to focus on those with lower incomes, to create a more realistic and lower risk way forward. This could also enable the abolition of the lifetime allowance.”
Separately, the firm’s half year results, published this morning, show life and pensions sales surged 34 per cent year-on-year, from £2.26bn to just over £3bn.
Sales of individual pension policies increased 56 per cent, from £607m to £947m, while drawdown sales rocketed 61 per cent, from £358m to £577m.
Protection intermediary sales were also up 43 per cent year-on-year, from £162m to £231m.
However, pre-tax profits measured on both an EEV and IFRS basis declined by 42 per cent and 78 per cent, respectively. The mutual says this was due to lower gains on investments in 2015 versus 2014.
Royal London Asset Management saw a drop in inflows in the first half of the year, while the Ascentric wrap saw inflows flatline.
The asset management company saw net new external business inflows of £511m, compared to £1.3bn in the same period last year, having been hit by high outflows.
The £1.87bn of inflows were on par with last year, but the £1.36bn of outflows were more than double the previous year’s £540m.
The company saw wholesale net inflows of £388m, with the UK Equity Income and Corporate Bond funds each seeing £135m in inflows, followed by Sterling Credit with £49m in inflows and the Cash Plus fund with £27m.
The Ascentric wrap platform benefitted from the new pension freedoms, with a 115 per cent increase in customers transferring to drawdown. However, gross sales stayed flat, with £1.19bn of sales in the first half of the year, compared to £1.16bn at the same time last year, a 3 per cent rise.
Net new assets under administration on Ascentric dropped in the first half to £565m, from £651m in the same period last year.
However, assets on the platform grew in the past six months.
“Ascentric, our wrap platform administrator, has achieved strong levels of new business growth and has increased its assets under administration by 8 per cent during the first half of 2015 to £9.6bn,” state the results.