Industry experts have warned that pensions taxation changes alone will not solve the UK’s £9,000bn retirement savings gap, and the government needs to focus more on auto-enrolment to encourage higher levels of contributions.
The government’s green paper, published in July, suggested a fundamental reform of the tax system is needed, and pension contributions are taxed upfront, rather than on withdrawals: a ‘taxed-exempt-exempt’ system like Isas.
The government said this may allow individuals to better understand the benefits of contributing to their pension as the government’s contribution might be more transparent
In response to the pensions green paper on tax relief, Stewart Hastie, pensions partner at KPMG, warned the debate on ‘exempt-exempt-taxed’ or ‘taxed-exempt-exempt’ is “missing the point”.
“Both can be designed to solve the complexity and inequalities of the current system. Designed correctly, both can improve outcomes for savers to help address our £9,000bn long-term savings gap.
“However any transition, particularly to TEE, must have sufficient lead time. Ideally five years, but no less than three.”
“The real question now is whether government commits sufficient funds to incentivise long-term savings, or use this as an opportunity to accelerate and increase tax revenue and defer the problem to future generations.”
Mr Hastie said he would like to see the government introduce the ability to consolidate pension schemes to make it simple and cost effective for individuals.
“Employers deserve more incentives, given their increasingly important role encouraging long-term savings and in helping bridge the consumer advice gap.
“Finally, there must be new approaches for getting those outside of regular employment to benefit from incentivised retirement saving including carers, temporary and itinerant workers, sole traders and the self-employed.”
Steven Cameron, regulatory strategy director of Aegon, said: “The Pension Isa may look simpler to brand new savers and would save the chancellor money in the short term, but in every other respect, it would be highly damaging to UK pensions, placing huge burdens on future generations of workers to support a growing retired population.
“The Pension Isa would be fundamentally incompatible with the current regime. Everyone already saving into a pension would have to stop paying into their existing scheme and set up a brand new one.
“Not only would that double the complexity, add to costs and lead to confusion for generations, it would also make it extremely difficult for anyone to bring all of their pensions together.
Steve Patterson, managing director at Intelligent Pensions, is against changing the current pension tax relief system for the next few years, particularly while auto-enrolment is being implemented and “so much work is still required” to help retirees maximise their options under the new pension freedoms.
Intelligent Pensions believes the public sector defined benefit system is a “bigger priority” for change and cost cutting.
“If there are to be changes to the current pension system, we believe reductions in the annual allowance and/or a move to an ETT basis would be the least disruptive measures. The tax exempt nature of pension investment is the least understood and valued benefit of pensions.
“The EET system at the input (contributions) level is not complex, and the fact that employees know there’s an immediate tax break (whether they understand it or not) is a very positive factor.
“Removing this would receive enormous adverse publicity and all related policy changes would be treated with huge suspicion by the public, who will feel their pockets have been picked.”
The Association of Member-Directed Pensions Schemes described the current system of pensions tax relief as “inherently complex”.
Its response said: “We are concerned by the approach of successive governments in undermining the principle of pensions simplification as enacted in 2004, and in eroding those allowances upon which the simplification concept was based.
“We are not persuaded that the lifetime allowance, when considered in the context of falling values of pension tax allowances generally, is a sustainable concept; moreover, we fear that the lifetime allowance risks being viewed as a barrier to ambition.”
The response added that if the lifetime allowance is to be maintained in legislation, the declining tendency of annuity rates offers justification for an increased lifetime allowance, in particular to address the potential for disparity in the underlying worth of the lifetime allowance between defined benefit schemes and defined contribution schemes.
“We believe that a move from the settled system of exempt-exempt-taxed to taxed-exempt-exempt could bring significant anomalies to the calculation of tax charges on the respective employer costs, under defined benefit schemes and defined contribution schemes, of members’ accruing benefits.
“We fear that an attempt to balance that disparity through different bases of tax charge and annual allowance would bring unwelcome complication to the pensions system.”
ruth.gillbe@ft.com
