Eight proposals to reform retirement saving

Inheritance tax free pension fund bequests and a single contribution limit for pensions and ISAs among proposals from Centre for Policy Studies.

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by William Robins on Jun 13, 2010 at 07:31

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Influential economist Michael Johnson has outlined eight proposals to reform retirement saving, including inheritance tax (IHT) free pension fund bequests and a single contribution limit for pensions and ISAs.

In a paper for the Centre for Policy Studies, entitled Simplification is the Key, Johnson argues for early access to pension funds and aligning pensions and savings taxation more closely.

He recommends IHT-free pension fund bequests up to £100,000, auto-enrolment into ISAs, removing tax on annuity income and a single savings contribution limit for pensions and ISAs.

‘Currently people have two questions: am I going to save and, if I am going to save, do I want to access it or take the tax bribe? Either way people could end up feeling they made the wrong decision,’ said Johnson. ‘What I am proposing is taking away that second question.’

The paper suggests early access to 25% of assets in a pension wrapper and the option of re-nominating ISAs as pension savings.

‘What we are trying to do is move ISAs and pensions closer together under a single tax regime. For example, there would be a limit of £45,000 shared between pensions, £35,000 annually, and ISAs’ £10,000 annual limit,’ said Johnson.

The paper also calls for exemption from income tax for annuities bought with ISA funds. This would then be combined with an extension of workplace pension auto-enrolment to ISAs.

‘The point is that ISAs are very popular and they attracted £37 billion of subscriptions last year while workers put £24 billion into pension savings,’ said Johnson.

‘If people are willing to save at all then why not go the next step and include ISAs in auto enrolment?

‘It would increase ISA assets and it is in the government’s interest to encourage people to buy annuities. Just don’t tax [annuity income]. People buy an annuity to ensure they have income, let’s not penalise that unfairly.’

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6 comments so far. Why not have your say?

Many of my friends feel let down by the pensions industry. Unfortunately these funds attract the attention of governments,and financial services who can see the opportunity to cream off slices for purposes not in the retiree's interest. How about scrapping the industry, let people save any extra for retirement above and beyond state and work place provision. This would free up a large number of people to work in a larger manufacturing industry.

stan

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I don't care what we do with private sector pensions (I am private sector) just make sure that we peg the performance of public sector pensions to the average performance of those in the private sector. That will give everyone in this country the incentive to fight for good provision and it will stop the two-tier pensioners coming about in 30 years time (ex government pensioners buying new cars and cruises and private-sector pensioners scraping a living). I am sick of funding my own 'gamble' of a money-purchase pension at the same time as forking out taxes for the public sector workers' gold-plated pensions!

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Why not just do away with risky funds. Most people want to save, not invest. Let them get tax relief and company contributions into something they actually trust like a index linked guaranteed savings account.

Pity economists don't seem to understand people.

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I agree with Anonymous 1. My beef is that the savings thqat people make for retirement should not be ringfenced or controlled by ANY external agency such as a SIPP provider using arcane rules dreamed up by the Treasury.

This money was earned by the individual and forcing him to pay part of it to another party is virtual theft if he cannot recover ALL of it in a lump whenever he needs it. The tax relief should be calculated and added up with each deposit and repaid on withdrawl. The capital gain earned on should be viewed as a government incentive and giveaway - no CGT!

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Why do pension companies keep your capital on death. The annuity they pay is not much more and often less than you can receive from intelligent investments. pay back the capital or give a substantially better annuity let us chose which option we want forcing them to give a better annuity

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dave goodwin

Jun 27, 2010 at 05:35

Annuities are such a rip off. I much prefer preference shares (or PIBS held within an ISA) where even if the price falls and even taking into consideration the spread you can at least get some of your capital back at any time. Of course they dont have FSCS protection but if you make sure that the share is irredeemable , cumalative and convertable and that the company is sound then you should be OK Of course there is always the possibility that the bonds can go the same way as LLoyds Bonds which is why I am only putting 5% of my savings into them But at around 8 to 10% AFTER tax they are still a lot better than rip off annuities where you can kiss your capital goodbye........

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