TISA: moving to an ISA model will destabilise workplace pension saving without offering a superior outcome for savers

June 23, 2019

Consumers favour existing EET system whereby incentives are received up-front rather than in the future
New policies would make pensions simpler and save the Exchequer £2.7 billion per annum
Recommendations outlined as part of a campaign to rebuild the habit of savings to provide for financial security, especially in retirement, before the UK reaches a tipping point in 2035¹

TISA, the financial services membership association, is warning that moves towards a pension ISA would be counter-productive as it would destabilise workplace pension saving without offering a superior outcome for savers and would also result in limited future tax revenues. The view has been developed by TISA’s Savings and Investments Policy project², (‘TSIP’, ‘the Group’) as part of a detailed set of recommendations to incentivise long-term saving including research³ of consumer preferences.

It says that moving from the current Exempt-Exempt-Taxed (‘EET’) system to a Taxed-Exempt-Exempt (‘TEE’) like ISAs and providing a government top-up on pension contributions would raise some major issues. Whilst consumers initially like and understand the concept of a pension ISA as it strikes a positive emotional chord, once the pros and cons are explained there is strong support for the existing EET system whereby incentives are received up-front rather than in the future.

TISA has outlined in its response to HMT’s consultation on tax relief five key reasons why a TEE approach would not provide a more beneficial and sustainable approach to incentivising savings:

“There is no evidence to suggest that TEE would lead to increased pension savings – it destabilises the current momentum for workplace pension saving without offering a clearly superior outcome.”
“The removal of taxed withdrawals in retirement reduces the brake on people spending their pension funds too quickly, something that Australia has already experienced.”
“It relies on an expectation of consistency of pension policy over a period of decades when this has been conspicuously absent in recent times.”
“There would be significant disruption to the saving expectations of individuals and to employers/providers who have made a major investment in the current pension system and who are accustomed to the flexibility of having both EET and TEE (ISA) saving available to them depending on their circumstances.”
“It implies future retiring cohorts would make limited financial contribution to society while consuming high levels of public services, a position which is simply unsustainable.”

This chart below shows the relative position of different taxpayers under EET, TEE and a 2 for 1 matching system. It looks at the value of the post-tax pension pot generated at retirement by a £100 gross pension contribution from each of the different taxpayer groups. The results are shown as the relative size of the pension pot compared to the outcome for a worker who is a basic rate taxpayer both in work and in retirement under an EET system, and so are shown as percentages of this reference group.

Comparison of value of pension pot at date of retirement under different tax treatments

	Basic rate in work, nil payer in retirement	Basic rate in work and retirement	Higher rate in work, basic rate in retirement	Higher rate in work and retirement	Additional rate in work and higher in retirement
Current EET	118%	100%	100%	82%	82%
TEE	94%	94%	71%	71%	65%
TISA – 2 for 1	141%	120%	90%	74%	68%