Michael Johnson urges the next government to scrap ineffective tax relief and NICs rebates on pension contributions.
Instead replace it with savings-based bonuses paid independent of tax-paying status.
In a paper published today by the Social Market Foundation – a cross-party think tank – Michael’s tax-related proposals form part of a broader plan for a simpler, fairer and more sustainable pensions landscape.
The paper addresses all three pillars of State Pension, workplace provision and personal provision, and considers both pre-retirements saving and the taking of post-retirement income.
In addition to replacing tax relief and NICs rebates with bonuses, Michael proposes the following:
- A larger, but later, State Pension (“Senior Citizen’s Pension”), supplemented by Universal Credit for low earners, extending beyond State Pension age.
- The introduction of a default process (with opt outs) by which pension pots may be accessed in retirement:
- an “auto-drawdown” phase from age 60 to 75, with people receiving between 4% and 6% of their total pension pot assets each year (depending on pot size); and
- “auto-annuitisation” of residual pots, at the age of 75, to provide a guaranteed income until death.
- An enhanced automatic enrolment framework, to broaden participation. Members of workplace pension schemes should be given the right to choose the pension scheme into which their employee and employer contributions are paid (“member choice”), a proposal that was the subject of a recent government consultation (concerning lifetime providers).
Last year, the Treasury is estimated to have provided £44 billion in Income Tax relief on pensions contributions, disproportionally distributed to the wealthy.
An additional £28 billion was paid out in NICs rebates on employer contributions; largely invisible to employees (and therefore unappreciated), and unavailable to the self-employed, NICs rebates primarily benefit company shareholders.
With public finances as constrained as they are, Johnson considers both tax-based incentives to be an “ineffective use of scarce Treasury resource”, evidenced by the UK having one of the lowest household savings ratios in the developed world.
Johnson suggests that bonuses should be paid on individual and employer (post-tax) contributions, capped at £2,500 per year.
A bonus rate of 25% would apply to all savings up to £10,000, more than adequate for 95% of people. Alternatively, to encourage those who find it hardest to save anything at all, a more progressive approach would be to pay a 50% bonus on the first £2,000 saved, say, and 25% thereafter (thus capping incentivised annual savings at £8,000).
Johnson said that his proposal to detach the Treasury-funded incentive from tax-paying status would increase the size of most pension pots.
Substantial beneficiaries would include those on low incomes (including non-taxpayers), as well as people with multiple part-time jobs (predominately women). The proposal would also save the public purse at least £10 billion each year, as well as providing a radical simplification of individuals’ tax affairs.
Johnson, said, “This paper is an attempt to present a pensions framework that considers, as a coherent whole, the three main sources of retirement income; the State Pension, and personal and workplace-derived savings. It pulls together proposals made in 30+ separate papers, written over the last 15 years.
“The framework is intended to be financially sustainable over the long-term, taking into account our ageing population. It provides for a larger, but later, State Pension, accompanied by a safety net, it proposes a more progressive distribution of taxpayer-funded savings incentives, and it complements 2015’s “pension freedoms” by proposing the introduction of a default process in retirement.
“The envisaged framework builds on the success of automatic enrolment by including both the self-employed and low paid workers, and also reiterates the case for lifetime providers.”
