Simplification is the key - Centre for Policy Studies

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CONTENTS Foreword Guiding principles Summary Introduction 1 Part I: Today’s long-term saving’s landscape 1. Background: what and how we save 3 2. The saver’s perspective 14 3. The employer’s perspective 25 4. The pensions and savings industry’s perspective 30 5. The Treasury’s perspective 37 Part II: The proposals and their implications 6. The proposals 49 7. Tax simplification: some options 53 8. The implications for savers 55 9. The implications for employers 62 10. The implications for the industry 63 11. The implications for the Treasury 66 Conclusion 75 Acknowledgements 77 Appendices 79 Glossary 91
A note concerning data Finding a consistent and comprehensive data set in respect of the nation’s long-term savings (i.e. retirement savings) is a source of considerable frustration. Indeed, it would appear not to exist; HMRC (the official source for personal pensions information) does not, for example, collect information on contributions to SIPPs, and the various industry bodies (ABI, NAPF etc.) naturally focus on their own memberships, none of which represent the whole retirement savings industry. Consequently some of the data herein is “patchy”, and much pertains to 2007 rather than more recently; data collection, verification and reporting takes time. But this should not materially affect the key messages, not least because when it comes to the pensions and savings arena, change is rarely rapid. Indeed, policy makers should focus on longterm “signals” (e.g. increasing longevity and the decline of final salary, DB schemes) rather than short-term “noise” (e.g. poor investment returns and the impact of low interest rates on present value calculations). A note on tax treatment nomenclature This paper has adopted the pension industry’s form of product codification for tax purposes, namely Exempt or Taxed, shortened to “E” and “T”. A product’s tax status is described chronologically by three letters, either E or T, where the first letter refers to contributions (of capital), the second to investment income and capital gains and the last letter to post-SPA income (e.g. a pension). Thus, for example, pension savings products are typically “EET” because the saver’s contributions are tax deductible (at his marginal rate, to the extent that they paid tax in that year) and any employer contributions are a deductible business expense (and attract a NICs rebate). Accruals (income derived from the investments, and capital gains) are treated as exempt (except for the 10p tax credit on dividends), but once the State Pension Age has been reached and the assets are realised, perhaps as an annuity, the income is taxed (excluding any tax free lump sum (up to 25%) paid upon retirement). Conversely, ISAs, for example, are TEE.
Page 1 and 2: Simplification is the key Stimulati
Page 3: THE AUTHOR Michael Johnson trained
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 26 and 27: 1.9 The international perspective A
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
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 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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