“Savings incentives” – what’s your idea?

JS Mill

A friend DMs me after reading my log commenting on the proposals put forward by John Ralfe and Tom McPhail in the Times

If you want the answer on pensions tax

(1) get your objective clear, and if you have more than 1 make sure they are not inconsistent (or decide how to deal with that)

(2) ask David Robbins for the design.

As I said in a tweet a week or so ago, we need those commenting to say how each of the amounts in the ONS table in net tax relief cost would be affected.

Ideally we also need the actual tax collected to be replaced by the estimated tax which will be paid in respect of the tax allowances given in the year concerned.

And NI needs to be dealt with separately. It is not rocket science but objectives need to be clear.

Also, the system is a mess just now and full of inconsistencies. We cannot both reform it and keep cherished nonsenses.

The objective of pension tax relief is to “strengthen the incentive to save”.

In 2015 , the Government issued a consultation with that title and this description

The government wants to make sure that the right incentives are in place to encourage saving into pensions.

The government is therefore consulting on whether there is a case for reforming pensions tax relief to strengthen incentives to save and offer savers greater simplicity and transparency, or whether it would be best to keep with the current system.

That is the exam question we have yet to properly answer. If you want to read a summary of all the answers we gave to Her Majesty’s Treasury , you can still do so, it is published here.

Over a hundred years ago John Stuart Mill argued that ‘the only purpose for which power can be rightfully exercised over any other member of a civilised community, gainst his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant.”

This is a quote taken from “Reasonable Force” a pamphlet published by Demos in 1998. The author, Ben Jupp is now a Director of Social Finance and still maintains that we can only compel people to save when not saving would lead to “harm to others”.

The systems of savings incentives we have in place is designed to prevent compulsion and to solicit responsible savings behaviour. The retirement incentives save us from compelling people to save which is otherwise known as direct taxation.

The one fundamental change we have seen in the landscape since 1998, has been auto-enrolment which has shown us , that people, where it is more bother not to, will save out of inertia. Ros Altmann and Tom McPhail argue that once we have proven that most people will save out of inertia, we can revert to compulsion, but that will be “gainst his will” for some and (to my mind) would be a regressive step.

Instead we should be asking my friend’s question – “what is the objective” of incentivising saving” and JS Mill’s answer is my answer – to avoid compulsion. If we can get people saving through auto-enrolment, let’s not compel them to.

And what is the prize?

Looking ahead, there are some clear wins

  1. If we can get people self- sufficient in retirement , we free up resource to help our children and grandchildren to the same
  2. This means reducing the financial strain on present day finances so we can meet the growing strain on our health service and social care
  3. It means doing away with much that is mean-spirited and wrong about our benefits system
  4. It means offering people the prospect of an old age that is marked by dignity (not the savagery dished out to the old in primitive cultures).

It is clear to me that this means offering an equality of opportunity through savings incentives. But the current system does not do this. 50% of all money lost to the Treasury through retirement saving incentives goes to just 10% of the population. Meanwhile the bill for meeting the healthcare and welfare of those who are not sufficient in retirement falls on the next generation – not on those retiring on good pensions – who are feather-bedded.

For instance, those of us receiving pensions , pay no national insurance on our pension income, we are generally taxed at a lower rate in retirement and enjoy numerous perks whether we are rich or poor.

My guess is that it is this my friend is referring to as “cherished nonsenses”.

What’s your idea for savings incentives?

My guess is that John Ralfe and Tom McPhail do not have the same idea behind their thinking on savings incentives. I won’t try to guess what inspires them. I know what inspires my ideas – the thinking is in this blog and in others – especially this one

The Government have consulted and consulted recently. I don’t think much has changed since 2016 when it last spoke on the matter.

It may be that the current chancellor can pick up in the budget where George Osborne left off prior to the Brexit referendum

I hope that we don’t have to go around the loop again and that does not mean that I hope that we persist with the current system. I am thoroughly with Tom McPhail when he wrote to the Times, the letter you can read on here.

The idea that will command popular appeal, needs to have the radical simplicity of Pension Freedoms. I personally see this as gradual  transition to TEE, with scheme pays cushioning the blow (for DB and DC).

That idea meets my view of what should be done, that is informed by JS Mill.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to “Savings incentives” – what’s your idea?

  1. alan chaplin says:

    I question even the objective of “strengthen the incentive to save”. If the incentive of being able to stop working one day isn’t strong enough, why would you think some tax relief/top up will make a difference?

    I suspect that the people that we are trying to incentivise have plenty of incentive already – they don’t earn enough to be able to save (at all/enough). Government can try to grow economy, increase wages, increase benefits, reduce general taxation for this group and I would expect those to have greater impact on savings than any tweak to savings tax relief.

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