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Industry warns Osborne against pension ISAs

George Osborne could press ahead with controversial approach even after criticism from pensions minister

4 March 2016

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A tax relief structure for pensions that resembles ISAs could discourage saving into a pension scheme.

Such a move would involve taxing pension contributions at the first instance, then neglecting to tax the interest that accrues on the saving and neglecting to tax withdrawals (of any size) from the pension pot.

This has come to be known as the TEE (taxed-exempt-exempt) approach but research from the International Longevity Centre - UK and Age UK suggests savers would not view this as a credible structure.

The report quotes a respondent as having said that 'a TEE system would "kill" pension saving as people would not find the promise of tax exempt withdrawals forty years later to be credible.'

Instead the report suggests keeping the current EET (exempt-exempt-tax) system and concentrating 'efforts on using tax reform to make the system fairer' for lower earners.

Basic rate tax payers currently make half of the total pension contributions in the UK, but only benefit from 30 per cent of pension tax relief.

'We fervently hope that all the talk about moving towards an ISA-style pensions system with contributions made after tax remains just that - talk,' said Caroline Abrahams, charity director at Age UK.

'We are wholly unconvinced that such a scheme would benefit this or future generations and extremely worried that it could, in fact, put off lots of people from saving for a pension at all.'

'The stakes are extremely high: dignity in retirement for millions of people in this country depends on us having a good, well-functioning pension system, and we undermine that at our peril.'

The report arrives just as various newspapers have reported that the treasury will press ahead with the pension ISA approach and ignore criticism from the pension industry as well as pensions minister, Ros Altman.

She told the Financial Times newspaper that taxing pensions is necessary to instil caution in the drawdown approach of savers.

'The freedom and choice reforms have put us in a place where people's pensions can work well for them. However, tax is a natural brake on them spending their pension fund too soon.'

Meanwhile, David Sinclair, director of the International Longevity Centre - UK, has said that a period of stability is necessary to stabilise the industry and savers' understanding of their options.

'Despite the success of auto enrolment, too many younger people are saving far too little to give them a decent income in retirement. The chancellor must ensure that future generations have access to the best incentives to support saving.

'We need long term savings policy, not one where the goal posts move from budget to budget. But developing a long term savings strategy to avoid future pensioner poverty will go far beyond tax incentives. Government needs to work with employers and savers to create this savings strategy. We must plan now for the long term.'

 

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Tax & Wealth structuring Pensions