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.