The potential roadblock for workplace saving

4 March 2016

Just a couple of weeks out from the Budget and the Chancellor has an important decision to make on pension tax relief. At this week’s Reform roundtable lunch on this very topic, it was sobering to hear participants emphasise that George Osborne’s decision on 16 March will affect generations of savers and shape the future of the nation’s savings.

Reform is necessary – we have been arguing for the last three years that the current system is unsustainable.

We strongly believe that a single rate of pension tax relief for all, set between 25 per cent and 33 per cent and framed as a ‘Savers’ Bonus’, is the best option for reform. A Savers’ Bonus is simple to communicate and understand, as well as sustainable – set at a rate of 25 per cent, it would deliver approximately £1.3 billion in annual savings to the Exchequer from defined contribution pensions alone.

Crucially, it is compatible with automatic enrolment. This flagship policy has been a huge success, signing up nearly 6 million new savers since 2012. However, the compliance cost of implementing these changes is estimated to reach a staggering £15.4 billion for employers alone. It is absolutely essential that future pension reform builds on this hard work, rather than undermining it.

The alternative proposal for reform, the Pension ISA, poses an enormous risk to the achievements of automatic enrolment. A shift from taxing withdrawals to taxing contributions creates a major challenge – new pension pots will have to be created in order to make withdrawals free of tax, while old pension pots will remain under the old regime, creating the need for a dual administration systems.

Some people would have to have pots under both the old and new tax relief rules for at least 50 years, causing even more public confusion over the pensions system. These pots, and thus this dual system, could potentially remain live indefinitely, as people pass on money in drawdown after death.  Consolidation of pots would be almost impossible as pension payments in retirement could not be part-taxable, part-exempt.

Employers would have to re-establish automatic enrolment schemes that have just recently been set up and inform those 6 million new savers about the change. Millions of employers throughout the UK who have already auto-enrolled their staff, thinking their job is done, would have to agree new contracts, possibly with a new pension provider, and help ensure that they and their workers all understand the vastly different tax system being operated. Are employers and savers really going to welcome the Pension ISA as a simplification?

Making employers undertake a partial re-running of automatic enrolment at the same time as providers are changing their own systems, and while one million small employers are setting up their first workplace pension scheme, would be a major roadblock in the implementation of the otherwise highly successful automatic enrolment programme.

The Chancellor is looking to shake up pension tax relief in a way which is genuinely radical, sustainable and fair. The Savers’ Bonus meets these requirements simply and effectively, whilst ensuring the stability of automatic enrolment.

Yvonne Braun, Director of Long Term Savings and Protection Policy, Association of British Insurers (ABI)

Detailed analysis of the options for reform can be found in the ABI’s response to the Treasury’s consultation.



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