Britain’s household savings ratio has plummeted to 4.9%, the lowest since records began in 1963. With savings rates falling and the top 1% of earners receiving double the pensions tax relief of half the working population, the time has come to reform the system.
The complexity, cost, and inflexibility of the pensions system, combined with widespread distrust of the pensions industry, is putting basic rate taxpayers off saving for their futures with young people, Generation X and Y, increasingly disengaged.
‘Five Proposals to Simplify Saving’ comes as a response to the Government’s recent announcement of a review into pensions tax relief.
The report sets out five main proposals to broaden the country’s savings base and save the Treasury money:
- Abolish tax relief on pensions and replacing it with bonuses on individual and employer retirement savings contributions. Crucially, the bonuses would be disconnected from tax-paying status.
- Introduce a generous cap on the total bonus any individual can receive in one year.
- Reform auto-enrolment to scrap the minimum earnings threshold.
- Replace NICs rebates with bonuses on employer’s contributions, paid directly into the employee’s personal accounts.
- Introduce a Workplace ISA to house employers’ contributions, locked in until age 60.
These reforms would particularly benefit low-income earners who save passively: today, they gain least from tax-related incentives. They would also boost gender equality and tackle the “net pay” problem. Furthermore, these reforms, if combined with replacing “band earnings” by “total aggregate earnings” for determining automatic enrolment (AE) contributions, would bring many more (low paid) people into AE’s embrace. And the process for determining AE contributions would be substantially simplified. Indeed, implementation of these reforms would dramatically simplify the savings landscape for people in all income brackets.
Robert Colvile, Director of the Centre for Policy Studies, said
“The pensions savings landscape is complex and many people are put off from adequately preparing for their retirement.
The proposals put forward in this paper would incentivise mass savings and save the Treasury an estimated £10 billion a year.
It is vital that reforms are made so that people can access financial products which suit their needs today, and in the future.”
Michael Johnson, author of ‘Five Proposals to Simply Savings’, said
“The current system of tax relief is incomprehensible to the general public.
Tax relief costs the Government billions each year but 68% of that flows to higher and additional rate taxpayers who do not need such a large incentive to save.
The Government should focus its reforms on proposals which do the most towards creating a broader savings base – such as replacing tax relief with bonuses on pensions contributions.”