People argue that a taxation system that offers limited incentives upfront and relies on “jam tomorrow” is flawed. People won’t trust it
But such a system is in place, it is labelled the Individual Savings Account (ISA) and people trust it.
Research suggests that people like to know where they stand and a promise of no tax in the future is one that they understand. By comparison, a promise of unknown taxes in the future (what pensions currently offer) is not seen as good.
A promise of tax-free cash at the end of a savings period has underpinned all successful Government initiatives over the past 50 years, from Life Assurance Premium Relief to ISAs.
This is behavioural psychology at work and has nothing to do with the fiscal reality. People are prepared to pay a premium for the certainty of tax exemption. I know that many of my readers regards tax relief as tax deferral and that the numbers I have used in recent blogs have ignored the impact of time (Bryn), but in today’s low growth, low income world, people are less inclined to buy a hypotheticals real return on money and more likely to stick with a “growth is cancelled by inflation” formulation.
To be frank, if we believe Thomas Phillipon’s long-term numbers, suggesting there is a 2% pa rake from the financial services industry, who can blame them? I see no great advantage in an over-optimistic view of returns on our money- projections have always got us into trouble and have consistently have created expectations that have not been met.
If you told most people that the deal on pensions was the deal on ISAs plus a little kicker either at the front end or at the back end of the savings period, that would be enough. People are happy enough to be putting away for the future, whether through the payment of national insurance or from the deduction from auto-enrolment. The majority of those who are opting out are not doing so because they aren’t bothered.
So I really don’t b buy the need to load tax-relief onto contributions and I do buy the idea of a clear tax view at the back end of pensions.
I want to see the Government incentive more clearly labelled, either in terms of ‘Bog-off’ or in nominal terms (£4 saved- £1 saving bonus). I want Government incentivising people not to spend it all at once by giving further hand-outs at retirement TEEN – (taxed, exempt, enhanced) and I want retirement savings to become part of our national DNA (not a perk for the well to do and wealthy).
We are the Government, we elect them and we vote them out. We get the Government we deserve. We deserve a good Government and stable policy. We have had poor pension policies over the years that has led to the current instability (we can’t go on like this).
This is why I am looking forward and not looking back and why I back radical reform of the pension system. In the end, it is the country as a whole, not the narrow vested interests of the pensions industry – that matters.