“In the Budget the Chancellor said that he was looking for radical reform of the tax treatment of pensions. We agree, we do need radical thinking. As HM Treasury has outlined in 2013-14, almost £50bn of tax was “forwent” paying for pensions tax relief, of which over £30bn goes to higher and additional rate tax payers. This is staggeringly regressive and expensive. That’s £30bn that could be used to pay down the deficit. Alternatively it could be used in more socially useful ways such as broadening out auto-enrolment to include provision for customers to be protected if they become ill, die or get made redundant. Furthermore it could be used to increase the National Insurance threshold. All three would be fairer, more productive and much cheaper than the existing regressive system.
“Legal & General is calling for a flat rate of pensions tax relief of 20% within the EET system (tax exempt contribution, exempt investment return, taxed at retirement income), which is re-branded as “save X, get Y as a bonus from the Government for free”.
We think this is far more financially sustainable for the Exchequer, is easy for the customer to understand, and works and supports retirement saving for this and subsequent generations to come.”
Legal & General recommends five considerations for Treasury in terms of the pensions system:
1) One nation, one rate: Irrespective of where in the UK you live, or what retirement savings vehicle you use, the amount of monetary contribution from the Chancellor should be the same. And the public agree. When asked earlier this month, 64% of Britons felt that any changes to the pension system would need to apply equally to all pensions (including public sector pensions).1
2) A decision for a generation: If somebody is saving for the long-term, they want a long-term product which is simple, easy and hassle free. Constant changes by the government make this hard to deliver, and in turn erode trust. That’s probably why when asked, 57% of those not yet retired thought the system would keep changing and 54% thought that changing the tax system now was just a stepping stone to increasing the tax that people pay on their pensions in the future2. Cross party support and a trusted system is essential.
3) Keep it simple: The Government needs to move away from talking about tax relief and talk about a “bonus” for retirement saving. This isn’t about rates, this is about how it’s marketed. A flat rate of pensions tax relief of 20% would be clear and simple for all to understand. One of the reasons it that the incentive can be explained as “save £4 and get £1 from the government”.
4) Make it sustainable: One of the key elements to sustainability is affordability. If the bill for the Government can’t be reduced to a level the public purse can support then we’ll be back here having the same debate well before the next general election. That isn’t good for anybody. So a flat rate of 30%+ is equally not sustainable, it’ll cost the Exchequer too much.
5) Work with the gold-standard: If any new pensions initiative doesn’t build on the fantastic momentum behind auto-enrolment and the hard work of employers and employees up and down the country, please don’t do it.
1, 2, 3: ComRes interviewed 2,059 GB adults online between 2nd September and 3rd September 2015. Data were weighted to be representative of all GB adults aged 18+ by age, gender, region and socio-economic grade.
Nigel Wilson concludes:“Auto-enrolment is one of the most successful public-private project in decades, it has reversed the decline in pension saving. It is the gold-standard in modern pension saving. Here at Legal & General we’re proud to have over 1.4m customers automatically enrolled into our pension products. Each and every saver is supporting a better retirement for themselves, their families and society more generally. That’s why we’ve put a self-imposed charge cap of 0.5% on our standard offering. It creates the right incentive for people to know that their hard saved money isn’t being lost in high charges. We’d like everybody to follow suit, or for the Government to make it mandatory.”
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