Savings and Investments Policy project
Pension Taxation Proposals
Charles McCready, TSIP Programme Director
2
Overview
• The taxation proposals have been developed by members of the TSIP project and have been broadly supported by a broad church of leading industry players
• Key objectives underpinning solutions include:• Adopt solutions that encourage
greater levels of savings
• Target low and middle income families
• Build upon the formula of the troika of employee, employer and government all contributing to the pension pot
• Build upon the success of auto enrolment
A dozen themes
3
• How the government presents pension tax relief
• The amount of pension tax relief
• Employer contributions
• Treatment of National Insurance on pension contributions
• Salary sacrifice
• Tax free investment growth
• Tax free cash
• Annual allowance
• Lifetime allowance
• Treatment of Defined Benefit schemes
• EET versus TEE
• Additional incentives
Matching – Buy 2, Get 1 Free
4
• Consumer do not generally understand tax relief
• Government should change how it presents contribution into pensions
• Matching contributions having an important effect on saving behaviours
• The match is less important than the amount of the match
• Introduce a single rate of contribution – 33%
• Encourage higher rate tax payers to keep saving
• Enhance lower and middle income savers
Buy 2– Get 1 Free !
Employers
5
• Employee contributions continue to be subject to NICs
• Employer contributions NOT subject to NICs on either employer of employee contributions
• Keeping the NICs status quo is intended to keep nudging employers to contribute to pension schemes
• Employers have a critical role to play
• Change contributions to a benefit in kind
• Basic rate tax payers to get a 20% tax credit to offset employee income tax
• Higher rate tax payers to get a 33% tax credit
6
Salary Sacrifice and tax free growth
• Moving to a single rate of government pension contribution requires savings
• Salary sacrifice should be abolished or at least deterred in the future
• HMRC should classify salary sacrifice as tax avoidance
• Consider mechanisms to deter employers from facilitating salary sacrifice schemes by making them liable for NICs on employer and employee contributions
• Need to also catch long term salary negotiations that result in lower salary in return for higher pension contributions
• Basic rate tax payers unaffected
• Tax free growth within the pension continues as per today
û
ü
7
Tax free cash and allowances
• Tax free cash would remain in place
• Acts as an incentive to save over the longer term
• Reduces overall rate for higher rate tax payers
• Difficult to change and remain fair to new savers
• Reduce annual allowance to between £20,000 and £30,000
• Introduce “use it or lose it” to encourage saving every year
• Reduction helps pay for single matching contribution rate
£40,000
£20,000
• Remove lifetime allowance on DC schemes
• Encourage ongoing savings into pensions
• Encourage executives to participate in same pension scheme as employees
£1,000,000û
8
DB schemes
• DB ring fenced and does not move to single matching contribution rate
DB DCOLD NEW
• Significant operational complexity in applying single rate to DB
• Half of employer contributions are related to deficit reduction payments
• Public sector DB forms bulk of future accrual and it is the generosity of the employer promise that is the problem rather than the amount of the tax relief
• The factor for valuing annual accrual used to test whether an annual allowance charge is due, could be increased (following independent actuarial assessment)
• The annual allowance could be reduced but life time allowance retained
• Salary sacrifice could/should also be abolished
9
EET versus TEE
• TEE system considered and dismissed on the basis that it would:-
o Make pension saving more expensive for both employers and employees and therefore reduce rather than strengthen the incentive for consumer saving
o The removal of taxed withdrawals would remove the system control in place (tax) which helps consumer to spread withdrawals through retirement and make it last longer
o The impact on public sector workers in DB schemes would be a significant pay cut unless mechanisms are introduced to have the tax paid from benefit accrual
o A shift to future retired generations that do not pay income tax yet consume high levels of public services is neither equitable for younger generations nor sustainable
o Less people working per retired person further increases burden on younger generations
10
Bonus contribution
• Concept of offering an additional contribution and nudging individuals to save more by creating a new “kink” point
• Bonus payment would be a flat monetary incentive e.g. £500 (per annum)
• Would require individual to hit a savings target e.g. 150% of auto enrolment target
• Introduces an element of competition to “get your bonus”
• Aimed at low to middle income wage earners
• Could provide a significant boost to low wage earner pension contributions
• Concept still being explored and refined
Top Related