Simplification is the key - Centre for Policy Studies

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Figure 13: The cost of pension saving tax relief (i.e. excluding ISAs), £ million 150 Tax relief, £m £40,000 £35,000 £30,000 £25,000 £20,000 Pre-2009 Budget £55k limit + marginal tax relief £35k limit + marginal tax relief (solid line) Post-2009 Budget, i.e. incl. 20% tax relief over £180,000 (dashed line) £35k limit + 20% tax relief for all £15,000 2009 2013 2017 2021 2025 2029 2033 2037 2041 In Figure 13 the graph lines slope down because pensions in payment (and therefore income tax) increase quicker than tax relief on contributions and investment accruals, reducing the cost to the Treasury. This flattens out in later years. The model’s results are fairly consistent over a range of different real rates of investment return (a reflection of the comparative approach to the modelling). The proposed annual limit for tax-incentivised saving of £45,000 is the result of adding, approximately, the current limit for ISAs 151 contributions to the proposed £35,000 limit for pension saving. An annual contributions limit would provide the Government with a simple lever with which to control the cost of tax relief, and it would only impact upon a very small proportion of the population (the wealthy). 11.2 The tax relief consequences of applying ISAs’ TEE regime to pension savings Figure 14 illustrates the cost of tax relief (net of income tax paid by pensioners) if the current tax framework for pension savings (EET) were changed to TEE (with no change to today’s contributions allowance). There would be an immediate saving of about £30 billion on upfront tax relief (see Figure 13’s post-2009 Budget graph line), so the net cost would initially drop to about £7.5 billion for 2009-10 (the dotted line in Figure 14). 150 Expressed in 2007 terms and based upon a long-term rate of real equity return of 2% p.a. Given the asset mix of the modelled portfolio, this equates to an overall real rate of investment return of about 1.5% p.a. 151 The ISA contributions limit is £10,200 from April 2010. The tax relief on ISAs cost some £2 billion in 2008- 09; HMRC, Tax Expenditure, Table 1.5, 2010. 67
Thereafter, the legacy EET regime slowly dies, income tax receipts from pensioners disappear, and TEE comes to the fore. Based upon a 2% annual real rate of return for equities, the “steady state” annual cost of tax relief settles down at around £8 billion, being the tax exemption on assets accruals (i.e. tax relief-exempt investment income and an estimate for “foregone” capital gains tax). 152 Figure 14: The cost of tax relief with a TEE tax framework for future pension saving 153 (no change to today’s contribution allowance) Tax relief, £m £20,000 £15,000 £10,000 “Middle E” in respect of the 1 legacy EET tax regime (in decline) “Middle E” in respect of the replacement TEE tax regime (in ascendancy) 2 £5,000 £0 2008 2013 2018 2023 2028 2033 2038 2043 2048 2053 2058 2063 Net cost of TEE tax relief 1 + 2 + 3 -£5,000 -£10,000 Income tax from pensions in payment 3 The cost of tax relief is very sensitive to the assumed rate of real return on assets. Figure 15 compares the net cost of tax relief under two different long-term annual rate of return scenarios for equities (2% and 3.5%), and two different contribution environments; today’s contribution allowance and the proposed £35,000 limit for pension savings. As Figure 15 shows, with a TEE regime, introducing a £35,000 limit on pension savings cuts the annual cost of tax relief by c.£1.5 billion in the long term (compared to today’s contribution allowance), but this is dwarfed by the impact of the real rate of return on equities. If this turns out to be 3.5% rather than 2%, the additional cost to the Treasury is c.£5.5 billion per year in “lost” tax income on investment accruals, derived from the vast 152 Note that if capital gains tax were increased to 50%, as was proposed in the May 2010 Coalition Agreement, “middle E’s” opportunity cost to the Treasury rises significantly. 153 Assuming 2% p.a. real rate of return on equities. 68
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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
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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 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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