Ahead of the DWP review on Automatic Enrolment (AE), leading pensions expert Michael Johnson details 12 specific pension reforms in “Reinforcing Automatic Enrolment”.
His recommendations are intended to :
- give individuals a stronger sense of personal ownership over their savings,
- ensure that the AE opt-out rate remains low
- broaden AE’s eligibility criteria particularly for lower earners and the self-employed
- increase the potential retirement income of lower earners
- incentivise contribution rates above the statutory minimums
- radically simplify the current pensions and savings system
- save the Treasury £10 billion a year
Johnson argues that while Automatic Enrolment in workplace pension schemes has been a success, the Government can do more to encourage saving, especially among the young and the self-employed. This can be achieved by redistributing the current savings incentives, including
- scrapping all Income Tax relief and NICs rebates
- replacing them with a 50% bonus paid on the first £2,000 of post-tax contributions (paid by employee or employer), and 25% on the next £6,000 (i.e. an annual bonus cap of £2,500): in total, £10,500 per year, which is more than adequate.
There are 12 specific proposals, particularly designed to benefit low earners, the self-employed, the young, employers and the Treasury:
- The AE Advisory Group should emphasise the importance of pension dashboard utility for engagement with workplace saving, notably the ability to consolidate disparate pension pots into one pot.
- Given the AE Review’s remit to ensure value for money for the taxpayer, it should consider the implications, for AE contribution and opt-out rates, of replacing Income Tax relief and NICs rebates with a re-distributive 50% bonus paid on the first £2,000 of post-tax contributions, and 25% on the next £6,000, i.e. an annual bonus cap of £2,500, paid irrespective of tax-paying status.
- Automatic enrolment contributions from employees under the age of 50 should be eligible to be paid into a Lifetime ISA, attracting a bonus.
- Automatic enrolment contributions from employers, and employees aged 50 and above, should be eligible to be paid into a Workplace ISA, attracting a bonus. The Workplace ISA would share the annual bonus cap with the Lifetime ISA. Tax-free withdrawals could be made from the age of 60. The Workplace ISA, which could reside within a Lifetime ISA.
- The Lifetime and Workplace ISAs should be regulated in the same way as workplace DC pensions schemes, including a charge cap. They should have the same Inheritance Tax treatment as pensions pots, and be excluded for means testing purposes.
- The minimum age for automatic enrolment should be lowered to school leaving age, thereby including apprentices, for example.
- AE’s minimum earnings threshold of £10,000 should be scrapped.
- The use of “band earnings” in calculating automatic enrolment contributions should be replaced with “total earnings”, capped at £40,000.
- Class 4 NICs (self-employed) should be increased by 3% to match Class 1 NICs (employees), characterised as bonus-eligible “auto-contributions” to a Lifetime ISA (for those under 50) or otherwise a Workplace ISA. These should be accompanied by a default which would redirect the 3% to HMRC, triggered by non-payment of a bonus-eligible “quasi-employer” contribution. The latter could, to some degree, count as a tax-deductible business expense. Both auto-contributions and quasi-employer contributions could be ramped up in the style of AE, increasing in 1% annual increments, to 3% each by 2020, say.
- The minimum AE contribution rates for employees and employers should be raised by 1%, to total 9% of total earnings. Proposal 2’s bonus structure would take total contributions to 13.5% of total earnings on the first £2,000 of employee and/or employer contributions, and 11.25% on the next £6,000.
- “Auto-protection” should be introduced, with two distinct components:
(i) “auto-drawdown” at private pension age, in the form of an annual income drawdown default of between 4% and 6% of pot assets, paid monthly; and
(ii) “auto-annuitisation” of residual pots, perhaps twenty years after private pension age.
- The AE Advisory Group should encourage the Government to reconsider its opposition to NEST developing mass market decumulation products, to include a collective drawdown capability to enable retirees to pool their longevity risk.