This is the latest from tax and pensions supremo – Michael Johnson. Love it or hate it – the pensions ISA or Super ISA as Michael calls it- looks set to dominate our thinking over the next few months
“Last year’s pensions liberating Budget (ending the requirement to annuitise) had profound consequences for private pensions. It reminded me of Michael Caine’s comment in The Italian Job: “You were only supposed to blow the bloody doors off!”
In July’s Budget, the chancellor launched a consultation into the whole future of the pensions tax regime. From the pension industry’s perspective, perhaps now “I am become Death, the destroyer of worlds” is a more appropriate quotation (a line from Hindu scripture, quoted by Robert Oppenheimer following the first test nuclear explosion).
Today, the savings landscape is characterised by two disparate regimes: pensions and Isas. Pension savings attract tax relief on contributions, withdrawals being taxed, whereas subscriptions to Isas are made with post-tax income, but withdrawals are tax-free. The chancellor is hinting at a dramatic simplification: the end of the pensions framework, to leave us with an Isa-centric world.
This would be widely welcomed, particularly by Generation Y (the under-35s). Pension saving is from a bygone age, increasingly at odds with how people are living their lives. Indeed, a pure Isa arena feels inevitable, not least because pensions tax relief (including national insurance contribution relief on employer contributions) is wholly incompatible with pensions liberalisation, which shatters the historic unwritten contract between the Treasury and savers.
The latter, having received tax relief on their contributions, were expected subsequently to secure a retirement income through annuitisation. But no more. This leads me to argue that all tax reliefs on pensions contributions should be scrapped, along with the Lifetime Allowance, as a simplification measure.
So, what should replace private and occupational pensions? We now have an opportunity to replace a ludicrously complex retirement savings vehicle with a fairer, more cost effective, simpler and transparent arrangement. Last year, I proposed a single Lifetime Isa for everyone, to be included in the auto-enrolment legislation.
Allocated at birth, it would serve from cradle to grave, signalling the emergence of a lifetime savings agenda. Each post-tax £1 saved (irrespective of source, that is, including employers’ contributions) would attract 50p from the Treasury, up to an annual limit of, say, £4,000. This is double the rate of incentive that basic rate taxpayers currently receive via tax relief, and a total of £12,000 is more than adequate savings capacity for almost everyone.
Savers would have ready access to their own contributions, crucial to retaining Generation Y’s engagement with saving anything at all. Already faced with unaffordable housing, college debts, fragmented careers, earnings stagnation, zero hours contracts, relatively thin occupational pension provision, a rapidly-retreating state pension age and, perhaps most challenging of all, faced with having to support an ageing population, this could be the first generation to experience a quality of life below that of their baby boomer parents.
Treasury and post-tax employer contributions should be locked in until retirement (perhaps with income and capital growth); thereafter they could be accessed in the form of a tax-exempt Isa Pension. Yes, an annuity, perhaps for a minimum of ten years, fuelled by the 50p incentive which, being flat rate, would address today’s fundamental conundrum that because Income Tax is progressive, tax relief is regressive, which is grossly unfair. And it is patently failing the next generation.”
this article was written for the Financial Times published Saturday 22 August 2015, Centre for Policy Studies Research Fellow Michael Johnson writes on the future direction for pension policy: