Simplification is the key - Centre for Policy Studies

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GUIDING PRINCIPLES The following guiding principles have been adopted for this paper, notably that: (i) lasting affordability, equality, generational fairness and simplicity (particularly in respect of tax) are desirable; (ii) customer need and the national interest (including the need to reduce the deficit) should override commercial interests; (iii) the tax framework should not distort rational, economic decision making. There should be no double taxation and no disincentives in respect of long-term saving; (iv) proposals should not rely on costs being deferred, in keeping with generational fairness; (v) to reduce the scope for inaccuracy, cashflow projections (requiring some simplifying assumptions to be made) should be comparative, i.e. compared with the pre-proposal cashflows using the same underlying assumptions. Furthermore, for clarity, they should be expressed in terms of today’s money; and (vi) it is desirable to minimise rules. They add to complexity, there are usually ways around them and they offend libertarian instincts. That said, the state has a right to protect taxpayers’ interests. iii
SUMMARY The UK’s long-term savings landscape can be characterised by one word: “complex”. 1 Tax is at the root of this complexity. There are multiple tax regimes in each of the three phases of saving (accumulation, decumulation and post-death). Another challenge is that the long-term savings industry is characterised by a fundamental schism. Two very differently taxed businesses (pensions and savings) are competing for the attention of one client base. Furthermore, they are offering products with very different attributes, making meaningful comparison almost impossible. This complexity is hugely damaging and is not in the national interest. Fewer savings means less long-term investment, which translates into lower economic growth in the long term, 2 accompanied by more pensioner poverty. If the savings landscape were simplified, we as a nation would save more. The pension and savings industry has suffered a near fatal erosion of trust, fuelled by mis-selling scandals, excessive costs and a long period of poor investment returns. This has catalysed a regulatory backlash. The industry must now embrace the Retail Distribution Review and work collaboratively with the FSA to help it rebuild that trust. Only once this has been achieved could the industry credibly commence negotiations with the FSA to reduce the regulatory burden. Occupational pension schemes are by far the largest source of long-term savings, but successive governments have failed to appreciate their value. Consequently, support for employers to promote them has been insufficient (limited to NICs rebates on employer contributions and tax-exempt investment returns). Where leadership to promote saving has been shown, it has buckled under the onslaught of vested interests; for example, NEST’s 3 contributions cap serves no customer need. 1 2 3 Throughout this paper, reference to “long-term savings” includes pension savings. Saving less does usually produce some short-term economic growth (via consumer spending). National Employment Savings Trust, formerly the Personal Account. iv
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: These proposals depend upon having
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
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Table 13: Net cost of tax relief un
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TEE would be hugely attractive to p
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5.6 Tax treatment: international pe
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PART II THE PROPOSALS AND THEIR IMP
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Proposal 6: post-retirement, amend
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7. TAX SIMPLIFICATION: SOME OPTIONS
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8. THE IMPLICATIONS FOR SAVERS Impl
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The higher rate taxpayers’ perspe
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segregated from any employer-sponso
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epresent a further step down the pa
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10. THE IMPLICATIONS FOR THE PENSIO
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Such principles would have to ensur
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Figure 13: The cost of pension savi
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pool of underlying pension assets (
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hardship” facility, whereby cash
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occupational pension scheme benefit
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CONCLUSION We would save more, for
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ACKNOWLEDGEMENTS This paper was cat
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APPENDIX I Summary of proposals fro
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APPENDIX II Value of assets in priv
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depending upon age at the time that
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APPENDIX V PRE-RETIREMENT ACCESS TO
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APPENDIX VII FINANCIAL PLANNING TOO
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APPENDIX VIII THE MODEL 173 The
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GLOSSARY Alternatively Secured Pens
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pensions and earnings, but excludes
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those with earnings above £4,940 b
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in cash terms, i.e. fixed at £770
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The UK savings industry is barely t
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Simplification is the key - Centre for Policy Studies

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