In 2002, Ros Altmann wrote a blog, suggesting we move from incentivising pensions savings through tax relief , to a system which targeted those who needed help most- those with low incomes who found it hardest to save decent amounts.
You can read the article here.
I’ve cut out the central argument of what is quite a long paper as it is as relevant today as it was 13 years ago.
The recent Sandler report recognised the limitations of tax relief and suggested that, while it might affect where people saved, it may not increase overall levels of saving.
Although the academic literature is unclear on this question, if it is accepted one thing that is clear is that Sandler’s analysis stopped short of thinking in detail about any solution to this problem. The one thing that Sandler did suggest is that a system of matching grants could be more effective than the current system. This is exactly what this paper examines. What might an alternative and more progressive incentive structure look like?
What are the aims of Government Savings Policy?
Government wants to spread the benefits of savings and asset ownership to all members of society. ‘Financial assets should be the preserve of the many, not the few’ . The Treasury also argues it is important that individuals are encouraged to develop a regular saving habit and to recognise the benefits of saving.
As far as retirement support is concerned, the government has declared that it aims to shift the balance between state and private pension provision. Currently, State pensions account for 60 percent of retirement income, with private provision
accounting for 40 percent, but the aim is to move to a position where this balance is reversed, with 60 percent of retirement income from private means. This would entail
a significant increase in private pension provision.
Measures have been taken to try and encourage this trend. The most significant has been the implementation ofStakeholder pensions, which were designed to be attractive to middle and lower income earners. However, sales levels have been relatively low and it is unclearwhether Stakeholders have created any new savers in their moderate-income target
group (ABI, 2001).
If Government is to meet its stated aim, further measures will
undoubtedly be required.
Why does Government want to encourage saving?
There are many benefits of saving, both from the individual saver’s point of view, and from the point of view of society as a whole. Some of these benefits are practical and some behavioural. The latter are only likely to come from the actual act of saving.
Just receiving cash benefits will not have the same effect.
For those who are wondering what our Pension Minister is doing with her time, I have this suggestion – read the rest of the paper.
I suspect that Altmann is working establishing a fairer simpler system for us to save for our retirement. A system that hopefully does not rely on the Heath Robinson system of Pension Input Periods, tapering Annual Allowances, restrictive Lifetime Allowances and mechanisms so arcane that we have to employ experts to tell us how they work.
I am quite happy to lose our minister for six months if what emerges at the other end is a fair, simple and understandable system of pension saving that we can all sign up to.
But I’ll leave the last word to Baroness Altmann (remember 13 years ago)
Government needs to consider moving away from the whole concept of tax relief as the main means of financially incentivising saving.
It is regressive, socially unjust and is not encouraging the majority of the population to save.
Tax relief also lacks transparency in two ways.
Firstly, from the individuals’ perspective because people do not usually see the actual amount of money that Government is putting into the pension and do not understand how it works.
Secondly, for policy makers and people wanting to scrutinise government expenditure, transparency is reduced because it is not part of the annual public expenditure round in the way that direct expenditure is.
Tax relief is also inflexible because the amount of incentive that can be given is determined by what tax rates happen to be at the time, rather than by what particular level of incentive may be required to encourage people to actually save.
The lower tax rates go, the less incentive can be given. This may not be optimal from the point of view of savings policy. It is costing the Exchequer huge amounts of money, which should be redistributed to provide better incentives to those who need them most, those on middle and low incomes.
It would be much more equitable and efficient to give everyone the same amount of incentive to save – in the form of higher incentives for basic rate taxpayers, not just removing higher rate tax relief. If Government did not want to commit extra resources to this, then at the very least, they should redistribute the public money currently spent on pensions tax relief.
The precedent for moving away from tax relief in this way has already been set by stakeholder pensions, which gross up contributions by 22 percent even for non taxpayers.
It is ironic that the seeds of the new incentive system were introduced under a Labour Government 15 years ago. Why I think it likely that we will move to TEE, is because of the gathering momentum created by Altmann and latterly Michael Johnson in this approach. The pension industry may not have listened, but the Treasury clearly did.