Simplification is the key - Centre for Policy Studies

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APPENDIX V PRE-RETIREMENT ACCESS TO PENSION SAVINGS: ILLUSTRATION OF AN ESCALATOR Assuming a saver is permitted to withdraw up to 25% of his pension savings’ prevailing asset value of £X, the next £X of contributions would then not be eligible for upfront tax relief. The saver’s ability to make tax-free withdrawals is “restacked” by subsequent asset growth and contributions. Consider an example with a five year withdrawal interval: (R-15 = Retirement age less 15 years, etc) Age R-15 R-10 R-5 Retirement Asset value £200 £260 £200 £300 25% of asset value £50 £65 £50 £75 Less cumulative actual withdrawal £0 £20 £45 £45 Maximum permitted withdrawal £50 £45 £5 £30 Actual withdrawal £20 £25 £0 £30 Post-withdrawal asset balance £180 £235 £200 £270 Interim asset growth £50 -£55 £60 Gross contributions £30 £20 £40 of which, tax relief on £10 £0 £35 Tax relief overhang* £0 £5 £0 * The tax relief overhang is to prevent withdrawals being round tripped into new contributions on which relief is gained. If there are no subsequent contributions, any overhang becomes irrelevant. This structure does not address the risk of asset prices falling in a period to the extent that cumulative withdrawals then exceed 25% of the asset value. This is only an issue at retirement; if so, the post-retirement lock-in amount could be increased by the shortfall. 85
APPENDIX VI VALUING DB (FINAL SALARY) PENSION ACCRUALS 171 The introduction of an annual contributions limit to pension savings would require a methodology for valuing DB (final salary) accruals. One approach is as follows: ignore DB accruals to-date, which would only be permitted to increase at a maximum rate of, say, RPI plus 2% (or simply RPI); base all future DB accruals on career average salary, with an obligatory transformation of final salary schemes onto this basis, going forward; value the accrual limit on a simple factor of 20 (as is done for today’s lifetime limit), so that in any given year the accrual would be valued as 20/60ths multiplied by pensionable salary (assuming a 1/60th basis of pensionable salary); pensionable salary should be capped at £105,000 so that future DB accrual at this level is valued at £35,000 (i.e. 20/60 of £105,000, with a 1/60th scheme); and if the accrual rate is higher than 1/60th, the salary cap should be reduced so that the maximum accrual remains at £35,000. 171 Provided by Brian Wilson of Hewitt Associates. 86
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Simplification is the key Stimulati
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THE AUTHOR Michael Johnson trained
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A note concerning data Finding a co
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These proposals depend upon having
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SUMMARY The UK’s long-term savin
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any annuitisation requirement, prov
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Thus, had pension savings products
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INTRODUCTION There has been a flood
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PART ONE: THE LONG-TERM SAVINGS LAN
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Japan’s savings ratio was once th
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scheme contribution rates are lower
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Table 1: Funded pension scheme asse
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1.9 The international perspective A
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Table 4: ISA savers’ income distr
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Table 6: The complexity of the tax
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Figure 4: Income options upon retir
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savings by delivering a framework t
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Figure 7: When non-savers might sta
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There are other aspects to consider
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3. THE EMPLOYERS’ PERSPECTIVE 3.1
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When employees with DC funds retire
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More specifically, employers are no
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Both businesses do have important c
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year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67: Proposal 6: post-retirement, amend
Page 68 and 69: 7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71: 8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73: The higher rate taxpayers’ perspe
Page 74 and 75: segregated from any employer-sponso
Page 76 and 77: epresent a further step down the pa
Page 78 and 79: 10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81: Such principles would have to ensur
Page 82 and 83: Figure 13: The cost of pension savi
Page 84 and 85: pool of underlying pension assets (
Page 86 and 87: hardship” facility, whereby cash
Page 88 and 89: occupational pension scheme benefit
Page 90 and 91: CONCLUSION We would save more, for
Page 92 and 93: ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95: APPENDIX I Summary of proposals fro
Page 96 and 97: APPENDIX II Value of assets in priv
Page 98 and 99: depending upon age at the time that
Page 102 and 103: APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105: APPENDIX VIII THE MODEL 173 The
Page 106 and 107: GLOSSARY Alternatively Secured Pens
Page 108 and 109: pensions and earnings, but excludes
Page 110 and 111: those with earnings above £4,940 b
Page 112 and 113: in cash terms, i.e. fixed at £770
Page 114: The UK savings industry is barely t
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