Pensions are a topic of conversation again. The new pension freedoms introduced by the last government, coupled with the introduction of auto-enrolment, are encouraging people to re-engage with how they save for retirement.
Now the talk is about the latest development with the Chancellor’s announcement in the summer Budget of a consultation on pensions tax relief.
In setting out the consultation the Chancellor pointed to the substantial increase in life expectancy over recent years, which has resulted in a shift away from final salary defined benefit pensions towards defined contribution schemes, into which the employer and employee contribute.
The government is therefore seeking to ensure that this increase in longevity and the changing nature of pension provision is matched by a system that incentivises people to take more responsibility for their pension saving. The aim is to deliver a system that is sustainable over the long term and that enables people to accumulate the finances necessary to meet their lifestyle aspirations in retirement.
But, for this incentivisation to work, it is important that the support on offer from the government is simple and transparent. Complexity should not be allowed to undermine the incentive for individuals to save.
This chimes with the findings of The Savings & Investments Policy Project – an unprecedented coalition of more than 50 financial services firms, trade bodies and consumer groups – established by Tisa to help re-establish a savings culture in the UK.
Research by TSIP has identified a looming crisis that will result in falling retirement incomes due to the low level of savings today.
TSIP recognises that measures are required to encourage more people to save for retirement and to promote increased levels of saving that will deliver a meaningful outcome. In a report published in March 2015 – Saving our Financial Future – TSIP outlined its recommendations should there be a government review of pension taxation.
Central to TSIP’s proposals are that any cost savings made should be re-invested back into pensions and used to boost retirement savings for low and middle income families with the objective of reducing future demands on taxpayers. The proposals also set out that the changes should be aligned with HM Treasury’s objective of getting more people to save, without incurring additional costs to the Exchequer.
It is commonly held that the concept of pension tax relief is poorly understood by the general public. TSIP is therefore recommending presenting tax relief as government matching contributions, because this will be more easily understood and can be expressed as a simple numerical ratio. Some employers already follow this process by matching employee pension contributions and evidence is starting to emerge to indicate that the existence of the matching contribution is more important than the level of matching.
Auto enrolment has already adopted this approach for both government and employer matching contributions, so adopting this presentation across all pension arrangements would be a natural extension of the concept.