Commenting on the Institute for Fiscal Studies’ Pensions Tax Report published today, Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life, part of Phoenix Group, said: “The current pension tax system is the product of years of changes and piecemeal reform by various governments and all too often the debate about its future focuses on individual elements. For example, in recent years much of the focus has been on the future of relief on contributions which is just one component of a much bigger picture. We welcome the IFS’ approach of looking at the system in the round and providing recommendations that offer the potential to maintain savings incentives while addressing issues of fairness in a cost neutral way.
“The challenge with any reform of pensions is that it risks being viewed as further tinkering by savers or that changes create unintended consequences in other parts of the system. Ultimately theses issues require detailed discussion between policymakers, consumer groups and the industry so that the full impact of any proposed change is understood and not be rushed in.
“We agree that lifetime allowance isn’t currently fit for purpose. At present the system penalises those who do the right thing and save regularly over their lifetime and for factors beyond their control such as investment growth. An increasing number of people are hitting the limit due to years of reductions and the freeze that was recently put in place so moving to a system based on contributions rather than pot value would be fairer. Making the annual allowance more generous also has appeal, particularly for those with uneven earnings such as business owners who may only be in a position to save later in life. However, there would be implementation challenges as pension providers don’t currently know the value of contributions made elsewhere.
“Proposals to introduce a cap on the value of the savings that can be accessed tax free is one way to ensure this package of reforms is cost neutral, although care would need to be taken as this is one of the most valued features of the current system.
“Ensuring pensions are used primarily as a source of retirement income rather than a means for wealthier people to pass down assets has its merits. The current death benefit rules are generous with pensions exempt from IHT and people are able to pass on assets either without tax or at beneficiaries’ marginal rate. Overall these proposals are a useful prompt to start a discussion focused on creating a pension system that encourages savings in a way that is also affordable to the government in the long-run.”
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