TISA: simplicity key to deliver effective change to the UK pension system
• TSIP outlines pension policy recommendations in response to HMT consultation on pensions tax relief
• 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 2035 (1)
TISA, the financial services membership association, has proposed changes to the UK pension system which it believes will make pensions simpler for the public and save the Exchequer around £2.7 billion per annum. The policies, which have been developed by TISA’s Savings and Investments Policy project (2), (‘TSIP’, ‘the Group’) are in response to HM Treasury’s three-month pension consultation process.
The evidence-based, independently costed, proposals set out to deliver a more effective approach to incentivising long-term savings, address the specific needs of the self-employed and so boost public confidence in pension savings, recommended measures include:
• Removal of the current approach to tax relief and replacement with a single national rate of pension matching contribution incentive for DC schemes, with the State providing £1 for every £2 from the employee/individual (“Buy 2 get 1 free”)
• The lifetime allowance to be scrapped for DC schemes
• Annual allowance limits to be reduced on both DB and DC schemes
• Tax-free growth and tax-free cash to be retained based on its clarity and popularity
• Salary sacrifice to be discontinued for the purposes of simplicity and savings to the State
• Employer pension contributions continue to be exempt from NICs
• A new Self Employed Pension scheme where the state would match contributions, for example 1 for 1 made by individuals up to total annual contribution limit of £4,500 per annum
Further details on each proposed policy are available on request.
Adrian Boulding, Policy Strategy Director of TISA said:
“We believe that the tax system plays a crucial role in maintaining a savings culture and that the system could be designed to provide a more effective incentive. The current system has been questioned for some time and its effectiveness as an incentive is difficult to evidence. However our research indicates that adopting a TEE system – whereby tax is paid on contributions up front – would be detrimental as it would reduce the level of pension saving, which will in turn impact on investment in the UK, economic growth and medium to long term Treasury revenues. (3)
“The implementation cost of TEE coupled with the need to maintain the existing system in parallel would also be significant and confusing for consumers at a time when clarity and simplicity is required.
“Our recommended approach seeks to provide simplicity for savers and builds upon the success of Auto-Enrolment. Whilst there is growing consumer confidence around exercising pension freedoms and choice, it’s clear that people still need strong encouragement to save. As a result, we believe that the current scheme of matching contributions within Auto-Enrolment should be extended to a simplified pension tax system.”
TISA’s Savings and Investments Policy project worked with the Wisdom Council (4) to test the proposed policies with savers and investors. Highlights include:
• 41% believe they know the size of the pension pot they will need – 18% believe they have planned sufficiently to achieve this – 53% do not know how much should be contributed each month to reach their goal
• 38% want young people to have access to their pension for a house deposit but 66% want access limited until 55+
• Matched contributions are key – the more employers and the Government contribute, the more motivated employees are to contribute to their pensions
• All advice needs to be simple and tangible
Adrian Boulding concludes:
“This consultation is an important opportunity to improve the existing pension system and to achieve a sustainable savings and investments settlement for the next generation. We believe that our Savings and Investments Project group has developed a series of innovative and sustainable policies, focused on how best to increase levels of personal savings across all segments of society to rebalance the pensions system. Our work has not stopped and we will be releasing further analysis in the coming weeks on the critical importance of pension savings to investment in the UK and on our GDP.
“The first year of this Parliament presents an opportunity to be bold, engage in debate and ensure the pensions system works for both present and future generations. Our proposals address how to tackle the on-going savings crisis and raise retirement savings levels for everyone, which will in turn increase the amount of money available to invest in UK Plc, thereby supporting wider economic growth.”
TSIP is an unprecedented group of over 50 leading financial services companies, trade bodies and consumer groups which published a report (‘Saving Our Financial Future’) in March 2015 outlining six policy recommendations to rebuild a culture of savings in the UK and restore financial security for households.
Ends….
For further information please contact:
Alistair Kellie – Telephone: 020 7680 6558/Email Alistair.Kellie@newgatecomms.com
Sara Lyons – Telephone: 020 7680 6550 / Email Sara.Lyons@newgatecomms.com
Email: TISA@newgatecomms.com
Notes for Editors
TISA is a not-for-profit membership association operating within the financial services industry. We represent the interests of over 147 member firms involved in the supply and distribution of savings and investment products and services.
TISA has a highly successful track record in working cooperatively with government, regulators, HMT, DWP and HMRC to improve the performance of the industry and the outcomes for consumers. Policy and regulation continues to be the major focus for our members with regard to corporate responsibility.
TISA and its members’ remit is evolving into a clearer focus on pro-active consultation in the regulatory world in order to influence policy and associated regulation before its creation, rather than reacting to issued policy directives. This will help to ensure a more considered policy creation from the authorities.
1. The TSIP initial report ‘Our Financial Future’ highlighted that we are set to reach a tipping point in 2035 when a generation retires less well-off than the previous one – a situation not seen since the establishment of the welfare state almost 100 years ago.
2. The Savings and Investments Policy project is working with a wide range of financial service companies, trade bodies and consumer groups to develop these pan-industry proposals. It is directed by an Executive Committee formed of 16 leading financial services companies including Aviva, AXA Wealth, BNY Mellon, BlackRock, Ernst Young, Henderson, J.P. Morgan Asset Management, L&G, Lloyds Banking, Nationwide, Northern Trust, Old Mutual, Pinsent Masons, RBS, Threadneedle Investments and TISA.
3. Moving from an EET to a TEE regime would be counterproductive
Considerable research has been undertaken into the pro and cons of moving to an ISA model for pensions. We have concluded that this option is less attractive to the public and the nation over the long term.
This chart 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 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 – Current EET 118%, TEE 94%, TISA – 2 for 1 141%
Basic rate in work and retirement – Current EET 100%, TEE 94%, TISA – 2 for 1 120%
Higher rate in work, basic rate in retirement – Current EET 100%, TEE 71%, TISA – 2 for 1 90%
Higher rate in work and retirement – Current EET 82%, TEE 71%, TISA – 2 for 1 74%
Additional rate in work and higher in retirementCurrent EET 82%,TEE 65%,TISA – 2 for 1 68%
We can therefore conclude:
• TEE results in considerably lower outcomes and would so would require a significant additional Government contribution unless all groups are to be losers
• EET is not as regressive as some people suggest. For the same £100 of gross earnings contributed to a pension plan, lower earners generally do better than higher earners
• A move to 2 for 1 matching would be more progressive, the switch benefitting lower earners at the cost of smaller pensions for higher earners
4. The Wisdom Council conducted qualitative and quantitative research with a demographically representative sample of 290 people aged 18-75 who are classed as “pre-retired.”