Simplification is the key - Centre for Policy Studies

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Such principles would have to ensure that an unscrupulous provider could not irresponsibly harness the power of the trusted ISA brand 148 for example. Tarnish the ISA brand, and the interests of the whole industry would be damaged – as providers of With Profits Funds discovered to their cost. 10.7 Operational considerations There should not be any technical barriers to implementing these proposals, although some providers may have to make a step-change in their IT capabilities. Data tracking would be required in respect of transactions such as early access to pension savings and fund movements within couples, not least to minimise the scope for gaming the tax framework. A number of legislative changes would be required to facilitate the envisaged increase in flexibility, such as the transfer of ISA assets into a pension savings product. It should not be necessary, for example, to have to go through the two-step required today (divest the ISA, then reinvest in the pension, completing the necessary ISA discharge and pension saving application forms to do so). It is not envisaged that these proposals raise any significant regulatory issues, but to the extent that there are any, they should not be allowed to distract attention from the vision: more people saving more, for longer. 148 There are indications that this is beginning to happen because of the very low rates of interest being paid on Cash ISAs. 65
11. THE IMPLICATIONS FOR THE TREASURY 11.1 The annual contributions limit Introducing an annual contributions limit with tax relief at the saver’s marginal rate enables the Government to appease, to some extent, additional rate (i.e. 50%) taxpayers, and the industry. This could be achieved without increasing the overall cost of tax relief, and also provides a simple mechanism to save money, depending upon where the limit is set. Basic rate taxpayers, and most higher rate taxpayers, would be unaffected by the limit. A model, summarised in Appendix VIII, was built by Hewitt Associates to examine the impact of different annual contribution limits and tax relief rates on the total cost of tax relief to the Treasury. It is solely focused on pension savings: it excludes ISAs, for example. Inevitably some simplifying assumptions were required but, to reduce the scope for inaccuracy, a comparative approach was adopted. As such, the model compares alternative contributions limits’ cost of tax relief using with a projection of the post-2009 Budget EET framework, 149 using the same underlying assumptions. It can also determine, for a given contributions limit, the cost of a universal rate of upfront tax relief (as opposed to relief at savers’ marginal rate). Figure 13 illustrates some of the results. Two key observations from Figure 13 are that: (i) an annual pension savings contribution limit (i.e. excluding ISAs) of approximately £35,000, with tax relief at the saver’s marginal rate, produces a similar total cost of relief as today. A £55,000 limit would cost another £2 billion per year; and (ii) introducing a 20% universal rate of upfront tax relief (i.e. ending relief at 40%), combined with the proposed £35,000 contribution limit for pension savings, would save some £6-£7 billion a year. 149 I.e. taking account of the April 2009 Budget’s impact on additional rate taxpayers. Note that the March 2010 Budget’s changes to the earnings threshold is expected to increase the yield to the Treasury by an extra £600 million from 2012-13 (HMT, Budget Report 2010, page 121, table A2, row f, 2010). 66
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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
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 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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