A panel of experts debated the role of the tax system when it comes to pensions and savings, in the latest CIOT/IFS collaboration at the RSA in London. The debate was chaired by the charismatic Paul Lewis, presenter of Radio 4’s Money Box.
David Thomas, deputy director of pensions and savings at the Treasury, took the audience through a detailed overview of how the taxation of savings and pensions has changed 2010. Thomas concluded that ISAs have not changed much apart from greater flexibility; among the many new incentives to save since 2010 were the Help to Buy ISA, Help to Save and the Lifetime ISA. There has not been a Finance Bill for ten years that has not included a change to pensions and savings. There have been a lot of changes to ‘accumulation’ (how much you can save) and the big change to ‘decumulation’ has been pension freedoms.
Paul Johnson, director of IFS, gave some reasons why the role of the tax system in relation to pensions and savings is so important. The first was that ‘the way you tax savings actually defines your tax base’. Johnson also said that the current system of savings and pensions tax allows you to take account of inter personal differences in lifetime income as opposed to annual income. The savings tax system allows you to smooth things out, he said. Johnson’s third point was that the taxation of savings and pensions sits right at the centre of the taxation of person income and the taxation of companies and profits. It matters ‘to the total amount of savings in the economy and more importantly to how people make choices of where people put their money’. A final reason he said, was that how the system works affects people’s decisions on when to save.
Johnson highlighted the ‘absurd’ situation that if your employer pays into your pensions, no NICs are paid ever and we have the ‘astonishing situation’ that the taxation of pensions has become less generous [over the years] except in the way it should have been less generous; in particular, no effort has been made to reduce the ’extraordinary’ NI benefit you get from your employer putting into your pension: the tax-free lump sum.
Yvonne Braun, director of long term savings policy at the Association of British Insurers, said the tax system has a ‘huge role’ to play in increasing the number of people investing and the amount of money being invested in pensions. She said better communication is necessary because most people do not understand how tax reliefs work. She spoke about a new book called 100 Year Life which looks at three stages of life now - education, career and retirement, the future of second, third and fourth careers, and time spent studying and learning new skills in-between. You need to invest more in yourself, relationships, education, fitness, relationship building and management of finances, she said, adding that while auto-enrolment has been a ‘successful story’, when it comes to adequacy or the amount of savings it is a different story.
Charles McCready, a director at the Tax Incentivised Savings Association, stressed that the tax system needs to help the 6 per cent of the 18 per cent of the working population who are self-employed who ‘have nothing to sell’, such as casual workers. He said we need a ‘holistic approach’ to the ‘millennials’ who have less money to save for a pension because of other pressures on their finances, such as rent and saving to buying a house or paying a mortgage. He is worried about confusion among young people because of the ‘blurring’ of what is a pension and what is an ISA. Tellingly, he said the reason auto-enrolment has been successful is because ‘we didn’t really give people an option [not to save]’ but the amount going in to them is too small.
Asked by the audience about the future of the 25 per cent tax-free lump sum and if there is a way to lessen the threat of ‘retroactivity’ on tax rules, Johnson said you can ask whether retroactivity such as CGT on housing or NICs on pensions is fair within a wider debate about intergenerational fairness in the UK. Thomas remarked that tax rates have been reducing for the past 20 years which has given an enormous ‘retrospective bonus’ to people who were saving in the 1980s.
A recording of the full Q&A session and the lectures by the panellists can be found on the ‘latest news’ section of the CIOT’s website here.
Blog: Hamant Verma, External Relations Officer, Chartered Institute of Taxation (CIOT)