Simplification is the key - Centre for Policy Studies

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1.9 The international perspective At the end of 2007, the UK ranked second in the world in terms of its holding of global pension assets, with nearly 11% of the total worldwide pension assets of $30.4 trillion. Only the US had more (with 64%), while the UK was followed by Canada (5%) and the Netherlands (3%). This reflects our long tradition of providing occupational pension schemes, and also indicates that our pensioners rely to a large extent on income from private pension funds, rather than the state. Furthermore, some European companies (in Germany, for example) carry large pension liabilities on their balance sheets as debt, rather than operate funded schemes with assets. The OECD nations accounted for 97.9% of all pension assets, 38 as private pension provision is in its infancy in most of the developing world. Brazil, Chile and South Africa are exceptions to this; and, in other countries, pension funds are now growing quickly. In 2008, OECD pension funds (in aggregate) experienced on average a negative return of 21.4% in nominal terms, but the UK’s negative 17.8% return was partly mollified by having been exposed to currencies that appreciated against Sterling. 39 Relative to the size of its economy, the UK’s private pension assets ranked sixth 40 in the international league (79% of GDP; see Appendix II). By contrast, the private pension assets of major competitors such as Germany, France and Italy are tiny (4%, 3% and 3% of GDP, respectively), reflecting pensioners’ greater reliance on the state. The UK has no public pension reserves, in stark contrast with some countries, notably Sweden, Japan, South Korea and the US (32%, 26%, 24% and 17% of GDP, respectively); see Appendix II. The tax treatment of private pension assets varies widely from country to country (see Section 5.6). 41 1.10 Individual Savings Accounts (ISAs) An overview of the UK’s long-term savings framework is not complete without referring to ISAs. Although ISAs are not explicitly sold as a retirement savings product, many savers, particularly basic rate taxpayers, retain their ISA assets for many years, and come to consider them as a flexible form of retirement saving. 38 39 40 41 IFSL Research, Pension Markets, 2009. OECD, Pension Markets in Focus, Issue 6, October 2009. After the Netherlands (138% of GDP), Iceland (134%), Switzerland (119%), Australia (110%) and the US (93%); data for 2007. OECD, Pensions at a Glance 2009: Retirement-Income Systems in OECD, last updated 10 August 2009. These figures all dropped sharply in 2008, the average falling from 75.5% of GDP in 2007 to 63.4% in 2008. Furthermore, OECD may significantly underestimate UK funded pension assets. Also see HMT/HMRC, Implementing the restriction of pensions tax relief, Annex B page 59, December 2009. 11
Unlike pensions, ISAs do not attract upfront tax relief on contributions. However they do provide similar tax relief on investment returns during their lifetime and also benefit from incurring no tax charge when the proceeds are withdrawn. As demonstrated later in this paper (Section 2.9), someone who expects to be an income or capital gains taxpayer in retirement may find that the tax relief on an ISA held to retirement is worth as much the tax relief on a pension; 42 it is just deferred to when assets are realised rather than made explicit at the start. In addition, an ISA offers the added flexibility of having no restrictions on withdrawing funds. Conversely, retirement savings products do offer a 25% tax-free lump sum when the associated pension commences, partly to reward non-access to assets pre-retirement. The importance of ISAs within the savings arena cannot be overstated: they are our most popular non-pension savings vehicle. More than 19 million people hold accounts that attracted over £37 billion of new savings in the last financial year, taking total assets to £275 billion 43 (more than 50% of the £450 billion of personal pension assets). Table 3: Individual Savings Accounts, 5 April, £ billion 44 2006 2007 2008 2009* Stocks and shares subscriptions £9.2 £10.4 £10.4 £9.4 Cash subscriptions £21.9 £22.7 £25.3 £28.1 Total subscriptions £31.1 £33.1 £35.7 £37.5 Stocks and shares market value £70.4 £80.1 £78.6 £116.5 Cash £111.0 £127.7 £142.8 £158.1 Total market value £181.4 £207.8 £221.4 £274.6 # accounts subscribed to in the year (million) 13.0 13.6 14.7 14.2 * Provisional ISAs appeal across the income spectrum, albeit with some skew towards lower incomes. Table 4 shows that the majority of accounts are held by people on less than median earnings; 45 to them, the annual investment limit (£10,200 from April 2010) is irrelevant. 46 Similarly, low earners are unlikely to be attracted by the CGT exemption, given their annual capital gains allowance (£10,100 for 2010-11). 42 43 44 45 46 Not taking account of a pension product’s 25% tax-free lump sum. Updated to £290 billion in the 2009 Budget speech. ONS, HMRC, ISA statistics, Tables 9.4 and 9.6, September 2009. £23,764 p.a. using April 2007 data to be consistent with Table 4. ONS, Annual Survey of Hours and Earnings, 2007. The March 2010 Budget announced that from April 2011, and over the course of the next Parliament, ISA limits will be indexed annually in line with the Retail Prices Index (RPI). 12
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: 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
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epresent a further step down the pa
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10. THE IMPLICATIONS FOR THE PENSIO
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Such principles would have to ensur
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Figure 13: The cost of pension savi
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pool of underlying pension assets (
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hardship” facility, whereby cash
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occupational pension scheme benefit
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CONCLUSION We would save more, for
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ACKNOWLEDGEMENTS This paper was cat
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APPENDIX I Summary of proposals fro
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APPENDIX II Value of assets in priv
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depending upon age at the time that
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APPENDIX V PRE-RETIREMENT ACCESS TO
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APPENDIX VII FINANCIAL PLANNING TOO
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APPENDIX VIII THE MODEL 173 The
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GLOSSARY Alternatively Secured Pens
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pensions and earnings, but excludes
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those with earnings above £4,940 b
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in cash terms, i.e. fixed at £770
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The UK savings industry is barely t
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