Simplification is the key - Centre for Policy Studies

The higher rate taxpayers’ perspective
It should be noted that the proposals for additional savings flexibility (between the ISA
and pensions worlds) are likely to primarily benefit standard rate taxpayers, both whilst
working and in retirement. Higher rate taxpayers could, of course, sell ISA assets and
contribute conventionally to a pension, thereby obtaining higher rate tax relief.
People who expect to be higher rate taxpayers in retirement, and looking to secure an
annuity income post-retirement, for example, would probably be better off retaining their
ISA assets rather than re-nominating them as pension savings pre-retirement (receiving
20% tax relief), only to then pay 40% income tax. Leaving their assets in an ISA would
allow them to take advantage of Proposal 7 to use their ISA funds to purchase a tax-free
annuity (consistent with the tax-exempt status of withdrawals from ISAs). Conversely,
those who expect to pay no income tax in retirement, but who are paying income tax
now, would probably benefit by moving their ISA assets into a pension savings product
just before reaching retirement, to receive the upfront 20% tax relief.
Gender inequality and reinforcing marriage
Proposal 8 (that couples may contribute to one another’s pension savings irrespective of
the recipient’s earned income), introduces much more flexibility to save for the long term
within couples. The objective is to address gender inequality and help reduce female
pensioner poverty (although males would equally benefit from the proposal). This
proposal should also reinforce the merits of marriage and civil partnership. It ends the
distinction between the sources of income within couples and significantly extends the
ability of non-taxpayers to receive tax relief on pension saving, 140 provided that their
partner pays tax. The requirement that intra-couple contributions be deducted from the
annual limit of both parties is to limit the Treasury’s tax relief cost. Thus, a couple
comprising a 40% taxpayer and a non-taxpayer could not obtain tax relief at 40% on their
combined annual contribution limit.
Anomalies
Inevitably some anomalies will emerge from these proposals, but we should not allow
this to distract ourselves from the “higher” objective, that of encouraging the majority of
people (i.e. 20% taxpayers, both whilst working and in retirement) to save for the long
term, which includes encouraging ISA assets to be re-nominated as (long term) pension
savings.
140 Today, non-taxpayers can pay into a personal pension scheme and benefit from basic rate tax relief
(20%) on the first £2,880 a year. The Government then tops up the contribution to £3,600. There is
currently no tax relief for contributions above this amount.
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