Savings and Investments Policy project

Pension Taxation Proposals

Charles McCready, TSIP Programme Director

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Overview

• The taxation proposals have been developed by members of the TSIP project and have been broadly supported by a broad church of leading industry players

• Key objectives underpinning solutions include:• Adopt solutions that encourage

greater levels of savings

• Target low and middle income families

• Build upon the formula of the troika of employee, employer and government all contributing to the pension pot

• Build upon the success of auto enrolment

A dozen themes

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• How the government presents pension tax relief

• The amount of pension tax relief

• Employer contributions

• Treatment of National Insurance on pension contributions

• Salary sacrifice

• Tax free investment growth

• Tax free cash

• Annual allowance

• Lifetime allowance

• Treatment of Defined Benefit schemes

• EET versus TEE

• Additional incentives

Matching – Buy 2, Get 1 Free

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• Consumer do not generally understand tax relief

• Government should change how it presents contribution into pensions

• Matching contributions having an important effect on saving behaviours

• The match is less important than the amount of the match

• Introduce a single rate of contribution – 33%

• Encourage higher rate tax payers to keep saving

• Enhance lower and middle income savers

Buy 2– Get 1 Free !

Employers

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• Employee contributions continue to be subject to NICs

• Employer contributions NOT subject to NICs on either employer of employee contributions

• Keeping the NICs status quo is intended to keep nudging employers to contribute to pension schemes

• Employers have a critical role to play

• Change contributions to a benefit in kind

• Basic rate tax payers to get a 20% tax credit to offset employee income tax

• Higher rate tax payers to get a 33% tax credit

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Salary Sacrifice and tax free growth

• Moving to a single rate of government pension contribution requires savings

• Salary sacrifice should be abolished or at least deterred in the future

• HMRC should classify salary sacrifice as tax avoidance

• Consider mechanisms to deter employers from facilitating salary sacrifice schemes by making them liable for NICs on employer and employee contributions

• Need to also catch long term salary negotiations that result in lower salary in return for higher pension contributions

• Basic rate tax payers unaffected

• Tax free growth within the pension continues as per today

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Tax free cash and allowances

• Tax free cash would remain in place

• Acts as an incentive to save over the longer term

• Reduces overall rate for higher rate tax payers

• Difficult to change and remain fair to new savers

• Reduce annual allowance to between £20,000 and £30,000

• Introduce “use it or lose it” to encourage saving every year

• Reduction helps pay for single matching contribution rate

£40,000

£20,000

• Remove lifetime allowance on DC schemes

• Encourage ongoing savings into pensions

• Encourage executives to participate in same pension scheme as employees

£1,000,000û

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DB schemes

• DB ring fenced and does not move to single matching contribution rate

DB DCOLD NEW

• Significant operational complexity in applying single rate to DB

• Half of employer contributions are related to deficit reduction payments

• Public sector DB forms bulk of future accrual and it is the generosity of the employer promise that is the problem rather than the amount of the tax relief

• The factor for valuing annual accrual used to test whether an annual allowance charge is due, could be increased (following independent actuarial assessment)

• The annual allowance could be reduced but life time allowance retained

• Salary sacrifice could/should also be abolished

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EET versus TEE

• TEE system considered and dismissed on the basis that it would:-

o Make pension saving more expensive for both employers and employees and therefore reduce rather than strengthen the incentive for consumer saving

o The removal of taxed withdrawals would remove the system control in place (tax) which helps consumer to spread withdrawals through retirement and make it last longer

o The impact on public sector workers in DB schemes would be a significant pay cut unless mechanisms are introduced to have the tax paid from benefit accrual

o A shift to future retired generations that do not pay income tax yet consume high levels of public services is neither equitable for younger generations nor sustainable

o Less people working per retired person further increases burden on younger generations

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Bonus contribution

• Concept of offering an additional contribution and nudging individuals to save more by creating a new “kink” point

• Bonus payment would be a flat monetary incentive e.g. £500 (per annum)

• Would require individual to hit a savings target e.g. 150% of auto enrolment target

• Introduces an element of competition to “get your bonus”

• Aimed at low to middle income wage earners

• Could provide a significant boost to low wage earner pension contributions

• Concept still being explored and refined