A new upfront government ‘savers bonus’, based on a single rate of tax relief, should replace the existing complex pension tax relief arrangements, according to the Association of British Insurers.
This bonus would top up payments made into a pension at a rate of £1 for every £2 or £3 put in.
The proposal forms part of the ABI’s submission to the green paper on pensions tax reform, drawing on analysis from the Pensions Policy Institute, the National Institute of Economic and Social Research and consumer research to consider the various options proposed by the government.
The ABI concluded reform is essential, arguing the current system is too complex and benefits wealthiest savers the most.
The suggested bonus system would create a simple and transparent system, according to the submission, with minimal transitional risk and economic investment protected.
Depending on where the rate was set (25 or 33 per cent) for every £3 or £2 paid in, an additional savers’ bonus of £1 would be paid. This would encourage personal responsibility by targeting savings incentives to lower and middle income earners, the trade body added.
Yvonne Braun, the ABI’s director of long-term savings policy, stated while there is no ‘silver bullet’ solution to replacing the current complex pensions tax relief system, it is clear no change is not an option.
She said a savers’ bonus based on a single rate of tax relief meets the government’s reform principles.
Ms Braun said: “In contrast, our forensic analysis of the options concludes that introducing pension Isas risks dissuading people from saving for their retirement, would be costly and complex to implement, and hit economic growth.”
The ABI also published new statistics, showing that in the three months since 6 April, providers paid out almost £2.5bn in cash and income drawdown payments.
Around 60 per cent of all cash lump sums paid out in this period went to people younger than 60, and around 80 per cent to under 65s, while only 42 per cent of income drawdown payments went to the under 65s.
As reported last week, most industry stakeholders rallied against the government’s proposal that pension contributions are taxed upfront, rather than on withdrawals, an Isa-like ‘taxed-exempt-exempt’.
Speaking to FTAdviser, Hargreaves Lansdown’s head of retirement policy Tom McPhail said he was broadly supportive of the ABI’s position.
“Reform is inevitable and that being so, the critical challenge is to develop a solution which is fair, simple, sustainable and which incentivises all sections of the population to save for retirement. A flat rate system of up-front incentives sat at around £1 for every £2 paid in would achieve this.”
David Trenner, technical director at Intelligent Pensions, also came out in support of the ABI proposals, commenting that pensions take a working lifetime to build up, so transition would be long and difficult.
“The concept of ‘buy one get one free’ is easy for the public to understand, but it has always been associated with short term offers. Pensions are long term. They are going to be complex whatever is done and we are not convinced that gimmicks are the way forward.”
Portal Financial’s managing director Jamie Smith-Thompson, said that the existing system of tax relief is easily misunderstood, especially as there are three different rates and higher and additional rate taxpayers need to claim the extra relief, rather than it being applied at source.
“A ‘savers bonus’ could be a good alternative and is certainly preferable to treating pensions like Isas with no tax relief, as extra money upfront provides an incentive to save for retirement. However, it would need to be easily explained and understood by savers.
“Such a change would need to be carefully thought out and very clear to savers what the benefit is for them. This includes the bonus itself being well communicated and a fair rate; I think around 30 per cent would be a good incentive for both basic and higher rate taxpayers,” he added.
Andrew Tully, pensions technical director at Retirement Advantage, said that his firm’s response to the consultation followed similar lines, suggesting a flat-rate tax relief ‘you save £2 and the government adds £1’, giving a clear incentive to save.
“When combined with the removal of the current lifetime allowance, which simply penalises people who have benefitted from good investment growth over time, along with the hugely complex tiered annual allowance, it hopefully simplifies the position.”
Jamie Jenkins, head of pensions strategy at Standard Life, added that the ABI’s position reflects that of its members, with his company also backing an incentive-led pensions regime, rather than one based on the current system of tax relief.
Meanwhile, the ABI has also published new figures on how people are accessing the pension freedoms.
On 6 April, the new pension freedoms came in which, the ABI said, resulted in an 80 per cent increase in calls to pension providers in the first month.
In the first three months, providers paid out almost £2.5bn in cash and income drawdown payments. Around 60 per cent of all cash lump sums paid out in the first three months went to people younger than 60, and around 80 per cent to under 65s.
For the same period, only 42 per cent of income drawdown payments went to the under 65s. In 95 per cent of cases where savers accessed a cash lump sum, they withdrew the entire fund.
The amount of pension freedom cash withdrawn in the first three months represented less than 1 per cent of all pension funds held by over 55s2.
peter.walker@ft.com
