Traditional Tax Incentives

In order to encourage retirement saving in Britain: should we place more emphasis on traditional tax incentives, or on how we ‘frame’ retirement saving opportunities, such as the specification of ‘default

options’ in levels of saving?

• ‘Granny Tax’ – recent budget• The annual allowances• Lifetime allowances – both been lowered

significantly in the past 2 years.

Jamie’s section.

• Tax Relief – single level?• Tex credit on low basic rates.• Dividend issues.• Employer contribution – penalising employers

who do NOT provide for low-income earners.

Brief Overview

• One way governments have traditionally tried to encourage retirement saving is by providing special tax arrangements, or tax incentives, for funds held in particular types of saving accounts.

• In order for such tax incentives to achieve their stated goal of increasing or encouraging saving, it must be the case that the saving level responds positively to an increase in the net rate of return.

• If that has to be the case, the funds going into such accounts need to have come from individuals reducing their consumption levels as opposed to simply moving money from one form of saving to another.

EFFECTIVENESS OF TAX INCENTIVES TO BOOST (RETIREMENT) SAVING: THEORETICAL MOTIVATION AND EMPIRICAL EVIDENCE: Attansio et al (2000)

Why are retirement savings and tax incentives such an on-going issue?

• The continual furore that surrounds these issues is mainly due to the ominous changes in demographic patterns predicted in the coming decades:

By 2061, Ireland will move from an old-age dependency ratio of six people of working age to every one person aged 65 or over, to a ratio of 2:1.

[OECD Economic Surveys: Ireland 2008 / Green Paper on Pension (2007) Section 3]

Why is this an issue?

With such a high proportion of the population out of the workforce (unproductive) it puts huge strain on Government pensions to provide – there is a ‘gap in coverage.’

Traditional Incentive Schemes

• The main incentive for saving (especially, for pensions) is tax relief.

This is where the Government adds an additional fixed amount to the amount of money one saves.

INSERT FIGURES HERE – OVERLAPS WITH JAMIE’S PART.

• However, certain limitations are currently in place:

• Namely; Annual and Lifetime Allowance.

These have been subject to much scrutiny in recent weeks due to the controversial budget. Nonetheless, their importance is undeniable, and can be seen as an ‘on-going issues’ relating to tax and pensions.

Recent Changes (due to the Budget and other legislations)

The Budget:Twitter went into a frenzy over the alleged #grannytax.

The 'age-related' income tax personal allowance has been scrapped. They currently have a higher tax-free allowance than individuals below the age of 64 – this figure however is being frozen at £9940 (65-74) and £10,090 (75+)

(Note this ‘extra allowance’ IS means-tested.

• However, as of April 2013 the standard personal (annual) allowance of individuals below this age threshold will be upped (yet, capped) to £9205. (additional income is taxed at 20%, 40% and 50% dependent on earnings)

• (Only individuals with earnings above £100,000 will be means-tested – only the very wealthy lose out)

• Further issues include: 1. A movement towards a flat-rate, simplified tax system where a

new single tier pension is set around £140 and based on contributions.

2. New cap on tax reliefs set at 25% of total income for anyone claiming above £50,000 in a year.

3. Lifetime allowance to be reduced to £1.5m (where lifetime allowance is a limit on the value of retirement benefits that you can draw from approved pension schemes before tax penalties apply.)

How do these changes effect savings?

Need overall assessment of how these changes

will impact on the general level of savings to the ‘average man’ – the lack of change in tax relief for 2012/2013 means they have relatively little effect on a middle-aged, middle-income, working individual. Issues mainly apply to polar groups – the elderly, the very rich and so on.

• http://www.commissionontaxation.ie/downloads/Part%2010.pdf

• http://discovery.ucl.ac.uk/2844/1/2844.pdf

• http://www.pensionspolicyinstitute.org.uk/uploadeddocuments/PPI_ACE_report_final.pdf