How Government Can Make More People Save

How Government Can Make More People Save.

The government is currently in consultation with the finance industry as a whole as well as consumer groups as to whether they should harmonise the pensions saving system with the ISA savings system to promote longer term savings with its "Strengthening the Incentive to Save" consultation.

Fixed Rate Tax Relief

One of the proposals is to move away from tiered tax relief where basic rate taxpayers receive income tax relief at 20% when personally saving into pensions and higher rate and additional rate taxpayers also receive tax relief at higher rates. The downside of receiving tax relief upfront is that when you come to draw your pension you technically give the tax back as usually 25% of your pension fund can be taken as a tax-free lump sum and the balance of pension whether taken as an annuity or drawdown as part of the new pension flexibility rules is then subject to income tax.

In a survey by a leading pension provider A J Bell, it was found that 40% of advisers suggested that the status quo should be maintained for the current time given the amount of changes that have happened recently and nearly 60% of financial advisers actually thought that the current system of tax relief and then being taxed when you draw your pension should not be changed. In short, 60% of advisers suggest no changes and the remaining 40% suggest changes but perhaps in a few years when people have got used to the real issues of managing their pension funds and the amount they withdraw from their pension funds using the new flexibility rules to ensure that they do not run out of money in retirement.

We have already in previous articles covered suggestions by the previous pensions minister, Steve Webb, and the above consultation document that may be a flat rate tax relief of 30% should be introduced. We suggested this was a crazy idea with both consumers at large and financial advisers not being stupid. The government would lose money using this approach.

Example:

• Pay £70 into a pension.
• 30% tax relief would mean this pension is immediately made up to £100.
• You retire the next day and you are able to withdraw £25 (25% tax-free lump sum) and the remaining £75 as taxable income, which for a basic rate taxpayer would mean £60 after tax.
• This would mean you have £85 in your pocket (£25 lump sum plus £60 net income) and it has only cost you £70.

Comment

The only way the government could offer a higher flat rate of tax relief on pension contributions and for it to be financially viable for them, they would need to withdraw the tax-free lump sum element which would instantly be a this incentive to save in pensions. There are two things that sell any product or service: fear or greed. In this case the government must appeal to our basic nature of "greed" by others feeling that we have all got a good value for money deal.

It is an interesting conundrum for the government given that we are an ageing population but we suggest that offering even greater flexibility and access to different proportions of pensions at different ages whilst maintaining tax relief incentives would still attract savers but protect consumers from themselves by having tiered access to flexible drawdown from age 50 through to age 60 and then unrestricted access via flexible drawdown from age 60 as we have today. In addition, the ability to transfer pension rights in life to our partners or our children would be a number fantastic incentive for longer term savings.