Experts are divided over what is to be done with the UK pensions crisis, following the unveiling of a Green Paper in the summer Budget.
Chancellor George Osborne suggested pensions could be “treated like Isas”, with savings withdrawn tax free and topped up by the government.
Pensions have already undergone significant reform in recent years, with the roll out of auto enrolment from 2012, and the scrapping of the effective compulsion to buy an annuity announced last year.
But there are concerns employees are not making big enough contributions to their pension pots to support themselves in the future, leading the government to consult on how best to incetivise the level of savings needed.
Joanne Segars, chief executive at the National Association of Pension Funds, said the announcement was “welcome”.
“We are pleased the Government has wisely chosen not to rush into any new wider reforms or jump to conclusions about what will work best as a reform, such as taxing pensions in the same way as Isas,” she said.
“This will be an important step and we will work with the Government to secure a clear understanding of the long-term implications of any decisions.”
Ms Segars added for the review to succeed, it “must look at taxation of pensions in the bigger picture of what genuinely incentivises people to save consistently over the long-term for their retirement”.
“Major changes in the taxation of pensions, such as a move to taxation, exempt, exempt, known as TEE, ask savers to believe a future Government will be able to keep the promises made by a chancellor today,” Ms Segars said.
“And when it comes to the rules governing pension taxation experience shows events rarely turn out that way.”
Malcolm McLean, senior consultant at Barnett Waddingham, also welcomed the Green Paper.
“As always with pensions, which are a longterm savings vehicle, the change over from one system to another would require some fairly complex transitional arrangements to be put in force to smooth the operation going forward,” he said.
“It is good that the government is consulting on all of this and not making the mistake they made with the pension freedoms which were brought in hastily and without full consideration of all the issues that could arise.
Mr McLean was relieved the government have not scrapped pensions tax relief.
“Given the importance of salary sacrifice as a means of incentivising, it is good at the moment at least, that the government have resisted the urge to axe this form of relief which is widely viewed as a positive ‘win win’ for both employer and employee.
But John Broome Saunders, actuarial director at Broadstone, a pensions adviser, feared the government had avoided the issue of how the pensions industry would shift from one system to another.
“The consultation document does seem to express genuine concern that the current perceived complexity of pensions acts as a disincentive for many,” he said.
“However, the paper makes no attempt to address what could be the real headache of any change – namely how to cope with the messy transition between two quite different approaches.”
Nigel Green, founder of deVere Group, was also critical, branding the chancellor’s £10,000 cap on tax relief “short sighted”.
“This is short sighted in the extreme,” he said.
“Individuals being financially secure in later life must be being actively supported by the government, not only because it means that people will be best-placed to have the retirement they wish, but it means that they are less likely to be a burden on the State later in life, and this will help ensure the country’s long-term, sustainable economic growth.”
He fears the government is gearing up to scrap pensions tax relief altogether.
“Worryingly, by highlighting that a Green Paper is to be published, the chancellor is, in my view, hinting that tax relief on pension contributions could go altogether [at] some point in the future.”
