The Government’s current consultation on “strengthening the incentive to save” seems to be missing some key background information around what the Government is trying to achieve. The Consultation seeks to “encourage people to save enough during their working lives to meet their aspirations for a sufficient standard of living in retirement” without defining what “enough” and “sufficient standard of living in retirement” is. Similarly, the Consultation requests that “any proposal for reform should also be in line with the government’s long-term fiscal strategy” but this long-term fiscal strategy is not set out in any detail. Some vague statements around current pressures, fixing public finances in the long-term and the trade-off between what taxpayers pay and what they get are not that helpful. A clearer steer from the Government as to its objectives will likely lead to more constructive responses to the Consultation.
The first helpful area of clarification would be what the Government considers a sufficient standard of living in retirement to be. This standard differs between people but defining a target (perhaps minimum?) level of income in retirement would be a good starting point for this process. The difference between this target and the State Pension represents what private provision is intended to deliver. The proportion of this private provision borne by the saver and that supported by the State (through tax breaks or the like) is a follow-on decision, influenced by a number of the factors set out below.
The capital required to provide a specified level of income in retirement varies, based on a range of factors including:
- the primary saver’s age, life expectancy and intended retirement date;
- the saver’s dependent’s age, life expectancy and the proportion of the saver’s benefit that this dependent is entitled to, if any;
- the rate of escalation of this income once in payment; and
- current Government bond yields.
Government should, ideally, be clear as to whether it wants to provide support to savers that is of equal relative value (that would require factors similar to those outlined above to be considered for each saver) or if it prefers a simpler system. Simplicity will lead to greater inequality in the support provided but might also capture other policy objectives (e.g. redistribution of income).
Another area of principle is whether Government seeks to provide relatively more support to some groups of savers than others. The current approach to pensions tax relief gives relief at the saver’s marginal rate so all savers are effectively saving pre-tax income up to the Annual Allowance (“AA”) (or Lifetime Allowance (“LA”) if relevant). The AA/LA limits the relative tax benefits of higher earners compared to lower earners. The AA taper announced recently for those earning over £150,000 per annum further limits the support these savers enjoy. It would be helpful for Government to explicitly set out its intended levels of support for different tax brackets/income groups.
Further detail around the Government’s long-term fiscal strategy, particularly as it relates to the support available to pensions, is the final piece missing from this puzzle. If the amount available for such support is (broadly) known then the rates of support for the different groups can be calibrated. Fiscal strategies and Governments change over time but having a clear starting point to work from at least provides savers/tax-payers with a way of measuring subsequent changes and assessing their effectiveness.
The additional background information set out above will have benefit beyond merely drawing more constructive responses to the Consultation. Government, both current and future, will have reference points against which to assess whether intended policy has been delivered. The effectiveness of delivery and success of the policy can then be objectively assessed. Chancellor, how about helping all of us to understand what you are trying to achieve?