Tax relief needs to be reformed and there should be a merger of pensions and Isas, a research fellow at the Centre for Policy Studies said, stating that a ‘‘workplace Isa’ should replace conventional pensions.
In a new paper Michael Johnson stated that the savings landscape is characterised by a “fundamental schism”, as the pensions framework provides tax relief on the way in, whereas subscriptions to New Isas are made with post-tax income, but withdrawals are tax-free.
Mr Johnson’s analysis noted a rise in Isa subscriptions, while annual contributions to private pensions fell, suggesting that the lure of 20 per cent tax relief on pension contributions is insufficient to overcome “their complexity, cost and inflexibility (until the age of 55), as well as a widespread distrust of the industry”.
He stated that tax relief and the 2014 Budget’s liberalisation are incompatible, meaning the door is wide open for wholesale reform, not tinkering, of tax relief.
The argument turned to “inevitably regressive” tax relief, pointing out that the broad acceptance by society that higher earners pay higher rates of income tax is nullified because affluent baby boomers are able to minimise their income tax by harvesting tax relief on pensions contributions.
”It is evident that for many of the wealthy, tax relief on contributions to pension pots is primarily a personal tax planning tool, rather than an incentive to save: they would save without it,” Mr Johnson wrote.
“Consequently, it is extraordinary that we accept a framework which provides the top 1 per cent of earners, who are in least need of financial incentives to save, with 30 per cent of all tax relief, more than double the total paid to half of the working population.”
Successive policy initiatives taken by the current government are interpreted as stepping stones towards the ultimate merger of pensions and Isas, including reductions in pensions’ lifetime and annual allowances, increases in the Isa annual limit, the end of so-called “death tax” and its abolition for Isas.
Mr Johnson stated: “In the interests of simplicity, the UK should grasp the nettle and adopt a clean ‘big bang’ approach, to avoid some form of protracted, progressive, transition.”
He suggested that the Treasury should identify a date when tax relief simply ceases in respect of all future contributions, with existing pension pots closing to further contributions, being left to “whither naturally” with the saver paying a marginal rate of income tax on withdrawals.
Mr Johnson first proposed the workplace Isa last summer and was more recently backed by Clive Shelton, deputy chairman of the Tax Incentivised Savings Association.
“The workplace Isa beckons and, for those without an employer sponsor, alternative (competing) providers should be available, including NEST,” he commented, explaining they could incorporate a form of risk pooling in decumulation to spread the post-retirement inflation, investment and longevity risks.
“Participation, however, should be optional, enabling savers to embrace the 2014 Budget’s post-retirement liberalisations (notably, to take cash from pension pots).”
peter.walker@ft.com
