It is just short of three years since the Treasury published a powerful paper on strengthening the incentive to save.
I remember it well, because I read it sitting in a former nunnery in Fornalutx, Mallorca, while the sun threatened to turn me a beautiful pink.
Introduced by former chancellor George Osborne, the then chancellor, the consultation document’s purpose was simple: to establish whether the way people are incentivised to save into a pension remains fit for purpose. Is there a better way than the current system, which links the amount of tax relief an individual gets on their contributions to their income tax rate? A system that favours higher-rate over basic-rate taxpayers – the incentives for additional-rate taxpayers were dramatically curtailed through the introduction of the tapered annual allowance.
As Mr Osborne said in the document’s foreword: “If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.” He added: “The government’s interest is in a lasting system that stands the test of time.”
The document went on to pose a number of key questions. Would a simpler system result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension? Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions? And would an alternative system allow individuals to plan better for how they use their savings in retirement?
It was not only me who devoured the document’s contents. About 450 individuals, financial institutions and think tanks responded with a multitude of thoughts on how pensions could be re-energised and revolutionised.
Although a shake-up of tax relief seemed likely, it never came. A backlash from a frightening alliance of Tory MPs, constituents and the Daily Mail caused Mr Osborne to take a step back – at a time when he was fearful of upsetting Middle England ahead of the June 2016 vote on Brexit.
So we remain where we were when Mr Osborne published his June 2015 consultation document. Apart from introducing the tapered annual allowance for high earners, the incentive to save into a pension is still greatest for high earners.
This was very much confirmed in a recent report on pensions issued by the Royal Society of Arts (do not be deceived by the name, it has a long history of issuing thought-provoking research on pensions). Entitled Venturing to Retire, the report focuses on ways to boost the long-term savings and retirement security of the self-employed, currently excluded from auto-enrolment.
But it says any reform in this area cannot be done without a radical overhaul of the pension tax relief system. It describes the current arrangements as ‘regressive’, pointing out that while basic rate taxpayers account for 51 per cent of current pension contributions, they only receive 32 per cent of pension tax relief. In contrast, higher-rate taxpayers make 41 per cent of contributions but get 53 per cent of the relief.