MPs call for huge Pensions savings overhaul

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Posted on: 1st August 2018

An authoritative government committee has suggested dropping the current pensions tax relief model and ending the newly-launched Lifetime ISA in preference of a universal flat rate. The Treasury select committee’s annual review of household finances has brought fear to wealthy savers and their advisers. It is believed that some of these recommendations could appear in a future budget.

The group, chaired by MP Nicky Morgan, said that a dangerous mix of slow income growth and low-interest rates, as well as increasing debt levels and the UK’s ageing workforce, was tightening household finances. The group also believes that the government should make drastic reforms to pensions and savings. It suggested a range of extreme measures, including the self-employed into auto-enrolment.

The problem with UK Finances and Pensions Savings

Since the financial crisis, the UK has experienced weak income growth. A continuous period of low-interest rates has hindered the returns on bonds and other assets. In the ageing population, falling home ownership and growth of the gig economy has formed a generation of less secure workers. The rates of savings are low, and levels of debt are rising.

Factors such as these mean that “for many households, the pressure on their finances will persist” and “are likely to exacerbate inter- and intra-generational differences”, according to the committee.

How changing Pension Tax Relief Would Help

The committee urges for the current pension tax relief system to be written off in favour of a lower annual allowance and a flat rate of tax relief. It believes it would be fairer to encourage people to save for retirement.

According to the governments Automatic Enrolment Review in 2017, around 12 million people in the UK are currently not saving enough for their retirement. This is despite them having more control over their pensions than ever before, following pension freedoms rules in 2015.

In its report, the committee suggested replacing the lifetime allowance governing what can be saved tax-free into a pension with a lower annual allowance. This would introduce a flat rate of relief and would promote the understanding of tax-relief as a bonus or additional contribution.

Critics claim that the current system awards the most tax relief to those on the highest incomes. In the 2015/16 tax year, 52 per cent of the total income tax relief paid on pension contributions went to those earning at least £50,000.

“[The committee’s proposals] would be more egalitarian and more redistributive. Top earners would get less, and lower earners would get a bit more,” said Tom McPhail, head of policy at Hargreaves Lansdown, the fund’s supermarket. “It would also be much easier to understand and communicate.”

Pensions for the Gig Economy

The committee claimed there was an “urgent need” to bring self-employed workers into the same automatic enrolment pensions system that other workers enjoy and condemned the government for having “no clear strategy or timetable for doing so”.

According to the report, the easiest approach to auto-enrolment for the self-employed would be through national insurance contributions. However, the government’s previous U-turn on chancellor Phillip Hammond’s proposal to increase taxes on the self-employed reveals the political risk of tampering with any element of this system.

Why the Committee Dislikes the Lifetime ISA

Launched in 2017, the Lifetime ISA was designed for those between the ages of 18 and 39 to help them get onto the property ladder and encourage pension saving. This account can be opened by anyone who is eligible at any time before they turn 40. They can use the tax wrapper to save up to £4,000 a year in a combination of cash or stocks and shares until they turn 50. They will then receive a government bonus of 25 per cent worth up to £1,000. The Lifetime ISA can be used for either a deposit on a first home or taken as tax-free retirement income after the age of 60. However, they may be charged if they withdraw the money for anything else.

Younger savers have made the most out of the Lifetime ISA. Other providers, however, have been slow to launch. Critics label the product confusing and say it potentially diverts money away from workplace pension savings.

The committee said it had “received strong criticism of the [LISA] over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers”.

Others believe that the Lifetime ISA has encouraged a generation of savers and investors. They believe that taking it away could add more confusion to the ISA landscape.

Martin Stead, chief executive of Nutmeg, the online wealth manager, said: “The average timeframe our Lifetime ISA customers plan to invest for is 16 years — this shows younger people are beginning to plan ahead with their savings. Helping them to do so is imperative and a behaviour that must be encouraged more.”

How Likely is it for these Recommendations to become Policy?

According to analysts, it isn’t that likely. Though the Treasury committee is influential, it does not have the power to set any policy. However, its detailed report could set the future path of travel if the Conservatives cling to power.

“The push towards [government] accountability for household savings and resilience is really positive and shouldn’t be underestimated,” said Mr McPhail. “However it is one thing for the committee to make those calls and quite another to expect the Treasury to pick them up and run with them.”

Analysts believe that the government lacks the political capital and the bandwidth to make such comprehensive policy changes now, especially as it tackles negotiations with Brexit.

“The chances of this happening now are slim to zero,” said Tom Selby, senior analyst at AJ Bell, a broker. “The government is struggling to get out of bed in the morning, so how on earth is it going to find the time and resources to undertake a complete uprooting of retirement savings incentives? It was deemed too difficult before this messy Brexit process started and it’s only become harder since.”

Talk to Haven IFA

When it comes to pensions savings and retirement, you need to be prepared to handle any changing policies that could affect your financial plan for the future. Haven IFA are here to help you plan and prepare for an enjoyable retirement. Get in touch for more information.