A ‘big bang’ approach is the best way to move into a tax-exempt-exempt pensions system, according to the Centre for Policy Studies, which slammed the existing tax relief setup.
The think tank’s research fellow Michael Johnson said it is expensive, incompatible, inequitable, illogical, incomprehensible and an ineffective use of Treasury funds.
Instead, he suggested that all income tax and National Insurance relief on pensions contributions should be scrapped, to be replaced by a 50p Treasury incentive per post-tax £1 saved.
Employer contributions, taxed as employee income but eligible for the Treasury incentive, would be paid into a new ‘Workplace Isa’, operating within auto-enrolment.
Withdrawals would not be permitted until the age of 60, thereby trapping the incentive, along with income and net capital gains.
A Workplace Isa and Lifetime Isa could reside in an ‘Isa warehouse’ alongside other segregated Isa cells dedicated to specific saving purposes like Help to Buy or long-term care, with each having its own tax-based incentives and deterrents, to reflect prevailing policy objectives.
Mr Johnson explained they would share a modest annual allowance - such as £8,000 - subject to Treasury modelling confirmation.
In terms of the change, he said that drawing on international experience, a ‘big bang’ approach is favourable in terms of the transition.
“The primary driver for moving from pensions’ EET framework to the TEE world of Isas is the inflexibility of pension savings prior to 55.”
Mr Johnson said this is at odds with how younger generations are living their lives, eschewing pension saving but engaging with Isas, thereby missing out on tax relief.
“In addition, a single TEE tax framework for savings would represent a marked simplification of the savings arena.
“But, in progressing from EET to TEE, it would be naïve to assume that the chancellor would pass up an opportunity to reduce the budget deficit by at least £10bn per year; nor should he.”
Malcolm McLean, senior consultant at Barnett Waddingham, acknowledged the rationale behind many of the proposals, but was not convinced that changes of this magnitude were appropriate at the present time.
“The move from contribution tax relief to one where contributions are made from taxed income and the proceeds of pension saving are allowed tax-free may be simpler to understand, but would not necessarily be in the best interests of consumers.
“It could have a devastating effect on contribution levels through auto-enrolment and run the risk of a future government reneging on the promise to pay the pension tax-free, it would also require the merging of the old system with the new one going forward – a complex operation in its own right.
He added that the ‘Isa warehouse’ proposal illustrates the practical difficulty of combining Isas and pensions into anything approaching a single savings vehicle, adding to rather than reducing the level of complexity involved.
This is not the first time Mr Johnson has called for a ‘workplace Isa’, stating back in April that the savings landscape is characterised by a “fundamental schism”, as tax relief is provided on the way in, whereas subscriptions to New Isas are made with post-tax income, but withdrawals are tax-free.
peter.walker@ft.com
