In a new report The 2016 Budget: Pensions, published by the Centre for Policy Studies on Thursday 18 February, leading analyst Michael Johnson summarises four potential scenarios for much needed pensions reform ahead of the March Budget.
The report explains the advantages and drawbacks of each scenario and warns that regardless of the approach taken decisive action on pensions’ tax relief is needed – endless tinkering with allowances, for example would only perpetuate uncertainty.
Johnson advises that to effectively incentivise saving and secure a substantial saving to the Exchequer, the Chancellor should focus on simplification. Then, for the remainder of this Parliament, the savings arena should be left well alone.
The four scenarios outlined in the report are:
- the end of all NICs relief on employer contributions;
- the introduction of a single flat rate of tax relief;
- the end of the 25% tax-free lump sum (TFLS); and
- replacement of all Income Tax and NICs reliefs with a 50p incentive for each post-tax £1 saved, housed within an ISA framework.
Michael Johnson comments:
“Ending NICs relief (and snaring salary sacrifice schemes in the process) would be the most simple and politically expedient reform, saving perhaps some £8 billion per year. Introducing any flat rate of Income Tax relief above 20% would, unless accompanied by other cost-saving measures, have to be accompanied by a reduction in the Annual Allowance (from today’s £40,000), to generate a similar saving.
Meanwhile, the Treasury would remain exposed to a ridiculously costly tax arbitrage, as those approaching the age of 55 can flip existing savings into pension pots to collect tax relief, only to then take out the 25% tax-free lump sum at 55. The truth is that retaining any form of Income Tax relief is fundamentally incompatible with pensions’ “freedom and choice”, which ended any requirement to annuitise.
The 25% tax-free lump sum should be scrapped in respect of future contributions but, in so doing, there would be minimal fiscal advantage in the near term. One positive consequence would be that this would encourage people to use their entire pension pots to purchase annuities that would be 33% larger than otherwise: potentially significant at this time of low interest rates.
This paper also considers a 50p incentive per post-tax £1 saved embedded in a Lifetime ISA framework incorporating a Workplace ISA for employer contributions. This would provide the simplicity and flexibility that savers crave: a single savings vehicle capable of meeting almost everyone’s short-term and long-term saving requirements from cradle to grave.
The Lifetime ISA, detailed herein, combines some ready access to contributions with an up-front incentive, leaving the saver in control. A modest annual allowance, sufficient to accommodate at least 90% of the population’s savings capabilities, would facilitate cost control, while leaving scope for the Treasury to save some £10 billion per annum.”
Click here to read the full report.
Bloomberg Business: Osborne Urged to Revamp U.K. Pension-Tax Relief in March Budget
The Telegraph: Answer to the pension tax relief question? A variable limit
New Model Adviser: Pressure grows on Osborne to scrap 25% tax-free lump sum
Professional Adviser: Will flat-rate tax relief make pensions even more complex?