Pensions Minister Steve Webb MP has publicly supported a 30% flat rate of relief. He also hinted that the Lifetime Allowance is potentially redundant. These sentiments coincide with the publication of a new report from Michael Johnson: Incentivising retirement saving: the end of tax relief, and a new beginning.
Johnson evidences why retirement saving incentives, which cost a staggering £54 billion last year, are an ineffective, and inequitable, use of Treasury funds. They have failed to catalyse the broad-based savings culture that Britain needs. In addition, radical reform is in line with the recent Budget, which put an end any requirement to purchase an annuity, thereby significantly improving retirees’ pension pot flexibility. Traditionally, incentives have been provided to compensate for pension products' inflexibility: they are no longer valid.
Johnson proposes sweeping away today’s tax relief framework, replacing it with a simpler, more redistributive 50p per £1 saved. This should be paid irrespective of the saver’s taxpaying status, to overcome a fundamental dilemma: income tax is progressive so tax relief is inevitably regressive.
The report’s proposals combine common sense, fairness and simplification with a hard cash incentive of up to £4,000 per year: £12,000 (including £8,000 from the saver) is more than enough savings capacity for almost everyone. Accepting that the highest earners would lose out, Johnson offers them three quid pro quos: scrapping the Lifetime Allowance; reinstating the 10p tax rebate on pension assets’ dividend income; and the ability to bequeath unused pension pot assets to third parties free of Inheritance Tax (perhaps limited to £100,000), provided that the assets remained within a pensions framework.
Johnson hopes his proposals will appeal to both the political left and right, albeit for different reasons. From Labour’s perspective, tax relief’s inequitable distribution is a logical target (50p per £1 saved is highly redistributive). Conservatives will appreciate the virtue of improving the effectiveness of Treasury spending (measured by an increase in the number of long-term savers), accompanied by an opportunity to cut the cost of incentives: this should appeal to a cost savings-hungry Chancellor. Indeed, pensions tax relief is now the lowest-hanging fruit in Whitehall.
The eight specific proposals:
- Pension contributions from employers should be treated as part of employees’ gross income, and taxed as such.
- Tax relief on pension contributions should be replaced by a Treasury contribution of 50p per £1 saved, up to an annual allowance, paid irrespective of the saver’s taxpaying status.
- ISA and pension products should share an annual combined contribution limit of £30,000, available for saving within ISA or pension products (or any combination thereof). This would replace the current ISA and pensions tax-advantaged allowances.
- The 25% tax-free lump sum should be scrapped, with accrued rights to it protected.
- The Lifetime Allowance should be scrapped. It adds considerably complexity to the pensions landscape, and with a £30,000 combined contributions limit for pensions and ISAs, it would become less relevant over time.
- The 10p tax rebate on pension assets’ dividend income should be reinstated.
- People should be able to bequeath unused pension pot assets to third parties free of Inheritance Tax (perhaps limited to £100,000), provided that the assets remained within a pensions framework.
- The annual allowance should be set at £8,000, with prior years’ unutilised allowances being permitted to be rolled up, perhaps over as much as ten years, all subject to modelling confirmation.
Media Impact:
- The Daily Telegraph: Pensions tax relief at 50p per £1 – state raid or aid?
- Daily Mail: Revolution in work place pensions to allow Dutch-style funds – but are they all they seem?
- Daily Mail: Tax-free lump sum on pension pots 'should be scrapped' and savers given 50p tax relief for every £1 they save, think tank argues
- The Guardian: Radical changes to 'inequitable' pension tax relief demanded
- Financial Times: Labour backs coalition plans for ‘collective pensions’
- Professional Pensions: Miliband backs report calling for tax relief overhaul
- Yorkshire Post: Michael Johnson: Pensions move with a whiff of past scandals
- FT Adviser: 'Flat rate could stifle pension savings'
- FT Adviser: Collective pensions: Lib Dems strike again
- CityWire: Pensions tax relief: how a flat rate would affect you
- Pensions Age: Scrap tax relief on pension contributions, think-tank argues
- Professional Pensions: Michael Johnson: Eight proposals to overhaul pensions tax relief
- HR Magazine: CPS report calls for radical changes to pension rules
- CityWire: Gov’t faces calls to overhaul pension tax relief regime
- Your Money: Scrap pensions tax relief - think tank
- Professional Adviser: Scrap pensions tax relief - think tank
- Financial News: Altering pensions tax relief is much easier said than done
- AOL Money: Will pension tax-free lump sums be scrapped?
- Yahoo! Finance: Pensions tax relief at 50p per £1 state raid or boost for savers?
- Professional Pensions: Industry calls for further reform on tax-relief
- Money Marketing: Tax-free cash at risk as Osborne's flagship pension freedom agenda opens £20bn loophole
- IPE.com: UK accused of schizophrenia over risk-sharing pensions policy
- Workplace Savings & Benefits: Scrap pensions tax relief - thinktank
- Money Observer: Is HMRC missing a £24 billion pensions loophole?
Michael Johnson - Monday 21st April 2014
Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.