Simplification is the key - Centre for Policy Studies

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Whilst the UK’s NRR for the mean earner is one of the lowest (41%), it is also has one of the most redistributive: the NRR of low earners (64%) is more than double that of high earners (29%). The three lowest NRRs for high earners are in the UK, Ireland and New Zealand but the latter two have flat-rate pensions systems. UK pensioners make up their income by relying on private pension provision to a greater extent than every other country in the OECD (excluding those with mandatory private or occupational schemes). The state clearly has a strong vested interest in encouraging people to save. This is not least because those who lack income in retirement otherwise fall back onto the state, mostly through the (means-tested) benefits system. 5.2 Tax relief Tax relief is delivered in three different ways (see Appendix IV), but whilst mechanics vary, the cashflow consequences are the same. In 2008-09 the Treasury “invested” over £36 billion, the primary bait being that contributions to pension savings attract full relief 106 (“front E”, subject to the allowances). Table 11: Registered pensions schemes’ tax relief, £ billion 107 2007 - 08 2008 - 09 Tax relief in respect of: Occupational scheme contributions Employees £4.4 £4.2 Employers £12.9 £11.6 Personal pension scheme contributions Employees £1.9 £1.6 Employers £2.5 £2.5 Self employed contributions £1.4 £1.2 Lump sum payments (unfunded schemes), other £0.6 £0.6 NICs relief on employer contributions £8.5 £8.2 Total up-front tax relief ("front E") £32.2 £29.9 Tax privileges of being a registered pension scheme ("middle E") £5.9 £6.7 Total tax relief £38.1 £36.6 Less tax paid on pensions income ("back T") £10.2 £9.5 Net cost to the Treasury £27.9 £27.1 The £6.7 billion “cost” of the secondary bait in 2008-09 (“middle E”, tax-free investment growth, 18% of total relief) is in respect of tax that was not collected by virtue of pension schemes’ registered status, rather than a hard cash contribution. This cost is significantly underestimated because the data excludes capital gains, which is difficult to quantify. 106 The tax treatment of pension savings is described as “EET” (exempt, exempt, taxed), referring to contributions, investment growth and income in retirement, respectively. 107 HMRC, Table 7.9 - Cost of reliefs for approved pension schemes, September 2009. 39
Also, note that “middle E” is not a genuine “E” because the 10% tax credit on dividends is not recoverable. 108 Table 11 does not include the “cost” of other savings vehicles that permit assets to be sheltered from tax, notably ISAs (which are TEE). 5.3 What is the purpose of tax relief? Tax relief is the Treasury’s principal method of encouraging pension saving so that people, post-retirement, are less likely to fall back onto the state. 109 Deciding the optimum distribution of tax relief is a complex issue. However unintentionally, tax relief can significantly influence social outcomes. What is fair and socially desirable? The (last) Labour Government’s position following Pensions Simplification (April 2006) was that it wanted to: 110 “...maintain stability, fairness and encourage long-term saving, providing a transparent and flexible regime, enabling individuals to make informed choices about pensions saving. The following key principles, have guided, and continue to underpin the Government’s approach to pensions tax relief: (i) generous tax relief is provided to support pensions saving to produce an income in retirement. Pensions saving is not however provided to support pre-retirement income, asset accumulation or inheritance; and (ii) pensions are provided with more favourable tax treatment compared to other forms of saving in recognition that these are less flexible than other savings and are locked away until retirement.” Accepting that tax relief is to encourage people to save, why do we want people to save for retirement? Is it actually: (i) (ii) (iii) to reduce pensioner poverty; or is it to save the Treasury some money by getting away with a smaller basic State Pension; or is it to boost savings in the economy because of the macro-economic benefit of a higher savings ratio? 108 The rebate was abolished by the new Labour government in its first Budget, in 1997. 109 Pension schemes need to be registered with HRMC before tax relief is given. Unregistered schemes have no restriction on the tax-free proportion of lump sums at SPA so benefits from them are usually taken as lump sums. Pension payments are taxable in both cases. 110 HMT, Budget 2007 Regulatory Impact Assessment, 10 Tax Relief For Pensions, 2007. 40
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 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 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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Simplification is the key - Centre for Policy Studies

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