The Chancellor may raise more tax revenue in the short term by a change to pension tax but there is no evidence to show that savers would save more as a result of further changes to the system.
The NAPF shares the Government’s desire to get more people saving more for their retirement but warns there are significant risks associated with a move to either TEE or a single rate. Instead, the NAPF urges the Government to focus its efforts on securing and building on the success of Automatic Enrolment, as we reach the crucial point for millions of small employers who are starting to enrol their employees for the first time.
Joanne Segars, Chief Executive, NAPF, said:
"The Government must be straight with savers, schemes and employers about what it is really trying to achieve with these reforms. It says it wants to incentivise saving but it also wants to increase the revenue to the Exchequer – but these two objectives are incompatible and lead to quite different courses of action. There is a very real risk that to increase the tax take in the short-term the Government will gamble away the long-term interest of savers.
“Our message to the Government is clear – do not act rashly and put at risk the very real success of Automatic Enrolment. Rushing these reforms will be bad news for savers with less money going into their pension pot each month, bad news for schemes with a massive amount of additional administration, bad news for employers with a big bill to pay for all the changes and bad news for the Exchequer with less money being paid in tax in the future.”
A copy of NAPF’s consultation response is attached and a copy of our earlier press release ‘Pension Taxation Myth Buster’ can be found here.
Why TEE is bad news
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Modelling a central scenario the tax take for TEE would be 15% less than the tax take under the current system1.
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Non-taxpayers and basic rate savers will lose money in a shift to TEE from the current system2.
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People will need to save more to offset the loss of tax take to future Exchequers and ensure there is no increased pull on State resources from a growing retired population3.
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82% of our surveyed members believe TEE would reduce pension saving4.
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63% of our surveyed members say it will add more than 10bp to member charges4.
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Additional payroll costs for employers of £20,000 - £800,000 depending on the size of scheme5.
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Additional administration charges estimated at £25,000 - £1million depending on the size of the scheme5.
Why a single rate is bad news
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86% of the respondents to the survey said they would close their defined benefit scheme (DB) to accrual and move to a defined contribution (DC) scheme4.
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20% of respondents said they would respond by changing benefits, half of these would replace pension contributions with cash or other benefits4.
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A single rate would have to be set at 25% or lower to meet the Chancellor’s test of sustainability. This brings limited benefit to basic rate tax payers and reduces the attraction of saving in a scheme for higher rate tax payers. If higher rate tax payers leave schemes the costs go up for those left in it (mostly basic rate tax payers).
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All employers will have to change their payroll systems with an average (mean) cost of over £110,000 per scheme5.
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