Simplification is the key - Centre for Policy Studies

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pensions and earnings, but excludes Disability Living Allowance, child tax credit, child benefit, etc. Guarantee Credit is up-rated in line with earnings. Higher rate tax (HRT) Independent Savings Account (ISA) Maximum Investment Plan (MIP) National Insurance Contributions (NICs) NEST (National Employment Savings Trust) Higher rate taxpayers are those who pay tax at 40%, i.e. excluding the much smaller population of additional rate taxpayers (50%). An ISA is a tax efficient savings and investment product that was introduced by the Government back in April 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs). An ISA can be made up of one or two components, a “Cash” ISA component and a “Stocks & Shares” ISA component. From April 2010 the annual contributions limit will be £10,200. Funds can be withdrawn from an ISA at any time and any such amounts are not subject to Capital Gains Tax (CGT). Any interest or interest distributions from investments and accounts in an ISA are tax free. The Maximum Investment Plan is a tax-efficient savings plan with embedded live cover, requiring regular payments for at least 10 years. Its performance is related to funds of the investor’s choosing, and it provides a lump sum at the end of the savings term free of any personal liability to tax. The contract can be extended beyond the ten years by continuing to invest contributions, whilst taking flexible, regular, tax-free income. The assets are subject to life assurance company taxation, which will affect the investment growth achieved. NICs, collected through the pay-as-you-earn (PAYE) income tax collection system, are paid into the National Insurance Fund (NIF) by most employers, employees, self-employed, and some unemployed people. The amount paid depends upon earnings and employment and marital status. NICs, via the NIF, finance a range of benefits, including state pensions (but not the means-tested pension credit), incapacity benefit, widows’ benefits, maternity allowance, guardian’s allowance, jobseeker’s allowance and the Christmas bonus. Part of the contributions is not paid into the NIF but goes towards the cost of the National Health Service. NEST, formerly the Personal Account, is intended to encourage employees without access to work-based pension schemes to save for retirement; the target audience is clearly the low paid and those in intermittent work. There will be auto enrolment but workers will be able to opt-out if they choose not to participate, i.e. “soft” compulsion. Employees will pay contributions of 4% on their National Insurance band earnings, with employers required to contribute 3%, plus roughly 1% from the Government through normal tax relief. Contributions are limited to £3,600 per year (based on 2005 earning levels), up-rated by earnings year on year. There will be a choice of investment funds, including social, environmental and ethical investments, as well as branded funds, as well as a (lifestyle smoothing) default fund for those not wishing to make an investment choice. The maximum administration charge likely to be capped at 0.3% of the fund under management. There has been much debate around this issue, not least because the low take-up of Stakeholder pensions is partly blamed on the lack of incentive for the financial services industry to push the product. When savers reach the State Pension Age they are required to purchase a lifetime 93
annuity with their account proceeds, having assumed the investment risk in the interim, (akin to a defined contribution ("DC"), or money purchase, scheme). There is a general ban on transferring rights into and out of the scheme. NEST will be regulated in much the same way as existing trust-based DC schemes. Primary Threshold Retail Distribution Review (RDR) Savings Credit State Pension Age (SPA) State Second Pension 174 (S2P) Also referred to as the "earnings threshold", an amount set each year by the government which triggers liability for an employee and his or her employer to pay National Insurance contributions (NICs). In the tax year 2009/10, the Primary Threshold is set at £110 per week (£5,720 p.a.). The RDR was launched by the FSA in June 2006 to address persistent problems in the retail investment market, notably insufficient consumer trust and confidence in the products and services supplied by the market. The FSA is seeking to go beyond simply treating the symptoms of the problems and address the root causes. The RDR is intended to modernise the industry. In Consultation Period (CP)09/18 the FSA set out the changes that it is proposing, notably to: improve the clarity with which firms describe their services to consumers; address the potential for adviser remuneration to distort consumer outcomes; increase the professional standards of investment advisers. In December 2009 the FSA published CP09/31, “Delivering the Retail Distribution Review: Professionalism; Corporate pensions; and Applicability of RDR proposals to pure protection advice”. This consultation is open until 16 March 2010. Savings Credit is intended to reward people who have saved for their retirement. Entitlement to Savings Credit requires a single person to have weekly income of between £96.00 and £181.00 (£153.40 and £266.00 for couples). Pensioners over 65 receive a credit of 60p for each £1 derived from a source other than the State Pension. Savings Credit is limited to £20.40 per week, determined as 60p x (the Guarantee Credit ceiling of £130.00 - £96.00) for singles, £27.03 for couples. Beyond this, and Savings Credit is withdrawn at the rate of 40p in the £1. Thus when income reaches £181.00 no Savings Credit is payable (calculated as £130.00 + £20.40 / 0.4). The State Pension Age (SPA) is 65 for men and 60 for women. However, the SPA for women is changing; it will gradually rise from 60 to 65 from 2010 to 2020. The SPA for both men and women is to increase from 65 to 68 between 2024 and 2046, with each change phased in over two consecutive years in each decade. The first increase, from 65 to 66, will be phased in between April 2024 and April 2026; the second, from 66 to 67, will be phased in between April 2034 and April 2036; and the third, from 67 to 68, between April 2044 and April 2046. S2P is the successor to SERPS and was effective from 6 April 2002. It is based on an earnings-related system similar to SERPS but with different accrual rates. As well as providing an additional state pension for the employed, S2P for the first time gives an additional state pension based on earnings of £13,900 (2009/10) to: 174 As explained by Scottish Life. 94
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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
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elderly and the wealthy, not least
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5. THE TREASURY’S PERSPECTIVE 5.1
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Whilst the UK’s NRR for the mean
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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 100 and 101: APPENDIX V PRE-RETIREMENT ACCESS TO
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 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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Simplification is the key - Centre for Policy Studies

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