|Another proposal for pensions|
|News - Latest|
|Monday, 26 November 2012 14:35|
The Centre for Policy Studies has issued a report proposing the annual contribution limits for ISA and tax-relieved pension saving be combined into a single limit of between £30,000 and £40,000.
This would represent a relatively small reduction in the cost of the financial incentives of between £1.8bn and £600m while the full limit should be available for ISA saving, it said.
It also proposed shelving higher rate tax relief thereby saving £7bn annually but as a partial quid pro quo the report suggests reinstating the 10p tax rebate on pension assets’ dividends and interest income, at a cost of roughly £4bn per year.
And it suggested replacing the 25% tax-free lump sum concession with a 5% “top-up” of the pension pot, paid prior to annuitisation which it said would be cost neutral.
But Tom McPhail, head of pensions research at Hargreaves Lansdowne, said while the report has many interesting ideas it was “unlikely any of them would ever work in the real world”.
He said: “There is a simple three stage test for this kind of package of ideas: will they be at least fiscally neutral? Will they encourage long term saving across all levels of society? Will they be at least as simple as the current system? These proposals fail at least two of these three tests.”
McPhail said echoing the dictum often attributed to Churchill about democracy, the current system of pension tax reliefs is “the worst possible system, apart from all the others that have already been tried”.
“Now is not the time to be trying to experiment with radical and potentially destabilising changes to the pension system,” he added.
Hargreaves Lansdowne said most people consider their ISA and pension savings as separate pots for different purposes. The firm said it liked the idea of offering investors more flexibility but believed pensions still offer the best route for most people to save for retirement: the combination of tax benefits and restrictions on access work positively for investors.
And it said “taking a sledgehammer to the tax relief rules” just as auto-enrolment is starting would “seriously hamper what is a hugely positive revolution in retirement funding”.
“There is also a call to end salary sacrifice which is just a nonsense – salary sacrifice works because it makes saving into a pension much easier. Salary sacrifice is often tied up with other benefits such as childcare vouchers, car parking, additional holiday etc, so separating pensions out will create additional cost and complexity,” added the firm.
“As we have seen in the past, any attempt to divorce tax relief rates from income tax rates just leads to bureaucratic complexity.”
Hargreaves Lansdowne also suggested the CPS idea of replacing the 25% tax free cash lump sum with a 5% enhancement of the pension pot was neither simple nor sensible.
“It provides a purely academic argument to what, for the investor, is an emotive issue,” it added.
“Benefits and lump sums accrued to date would need to be preserved, so this would take 40 or so years to work through the system. This would create additional administration and ring-fencing, causing additional costs for pension providers which would then be passed onto the consumer and HMRC. Transfers between providers would become more complex and onerous.”
The firm said cutting the tax-free cash sum (known as Pension Commencement Lump Sum) would be a large nail in the private pension coffin.
“One of the biggest problems with pensions is people don’t trust Governments to leave the rules alone. The best thing the government could do right now is exactly that; nothing,” it added.
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