- Major review of the pension tax system launched by respected think-tank the Institute for Fiscal Studies (download the report)
- Former Labour Chancellor Alistair Darling and former Conservative Work and Pensions Secretary David Gauke will help oversee the project
- Wide-ranging review will centre on three key questions:
- Are people saving appropriately for retirement, in terms of both the amount and the form of saving, and if not, how can government policies help?
- How should the state support people from late working life into and through retirement?
- Do people require more assistance to use their wealth appropriately through retirement?
- AJ Bell urges review to focus on simplification and improved retirement savings levels
Tom Selby, head of retirement policy at AJ Bell, comments:
“Pensions, and particularly the tax system linked to pensions, have been subjected to incremental and often incoherent reform since Lord Adair Turner’s Pensions Commission delivered its final report in 2006. Given that Commission’s findings were published 17 years ago, we are long overdue a deep assessment of how the UK retirement system is working and any reforms that could help improve financial resilience.
“The original Turner Commission report was the catalyst for automatic enrolment, a reform built around cross-party consensus that has helped introduce millions of people to retirement saving for the first time.
“While auto-enrolment is not perfect – in particular the issue of pensions adequacy and how to scale up contributions needs to be addressed – it has stood the test of time in large part because politicians broadly agreed it was necessary to begin addressing chronically low retirement savings levels in the UK.
“We now need a similarly consensual approach to be taken on the issue of pensions taxation and wider retirement savings policy. Overwhelming complexity and having to deal with constantly moving goalposts undermines confidence in pensions and risks putting people off engaging altogether – and yet that is exactly what we’ve seen in policymaking since Turner.
“If you consider pensions taxation, the annual and lifetime allowance were salami sliced year-after-year by successive governments, particularly post-2010, before Chancellor Jeremy Hunt’s latest Budget reversed this trend by hiking the annual allowance and abolishing the lifetime allowance charge.
“Labour’s pledge to reverse that decision if it wins the general election is a microcosm of the problem a lack of consensus on pensions taxation creates. This IFS review could potentially form the basis for a more sensible, long-term approach to pensions taxation, with the aim of making the rules easier to understand and encouraging more people to save for their financial future.”
The IFS’ three key questions
- Are people saving appropriately for retirement, in terms of both the amount and the form of saving, and if not, how can government policies help?
“Auto-enrolment has been successful in dramatically increasing the number of people saving something for retirement, but now is not the time for the government to sit back and admire its achievement. Given the UK has created a long-term savings framework around defined contribution (DC) pensions, it makes sense to build on these reforms rather than confusing the landscape further. The possible exception to this could be creating a rainy-day saving mechanism into auto-enrolment, to help boost short-term financial resilience.
“Minimum auto-enrolment contribution levels, set at 8% of earnings between £6,240 and £50,270, are too low to provide a decent standard of living in retirement for most people and will, at some point, need to increase. The big question is how high minimum contributions should go, how they should be increased and when that should happen.
“Introducing a form of ‘auto-escalation’ – where pension contributions rise when someone’s salary rises – could be one way of increasing the amount people save for retirement without causing a surge in opt-outs. The government could also consider whether people should be given the option of opting down from any contribution rise, rather than the current all-or-nothing choice most people face.
“In addition, retirement saving solutions need to be found for those who are not covered by auto-enrolment, in particular millions of self-employed workers. There are ideas of how to do this, including potentially using the tax system to effectively auto-enrol the self-employed – although this approach would likely involve significant costs to the government.”
- How should the state support people from late working life into and through retirement?
“Automatic enrolment into DC pensions is the central pillar of UK retirement policy and places the emphasis on individuals to take responsibility for their financial future.
“The focus of policy therefore needs to be on education and empowerment of savers to make retirement decisions that are appropriate to their needs and circumstances. All-too-often there is a clamour for new products to ‘solve’ retirement for people. But the pension freedoms introduced in 2015 mean that savers have the tools to build a retirement plan that suits their needs today. Indeed, lots of people already take advantage of the flexibility of drawdown with the security provided by an annuity income.
“Ultimately, with the demise of defined benefit (DB) pensions in the UK, savers need to be given the tools to make the most of their retirement pot, through the provision of information, guidance and, ideally, regulated advice.”
- Do people require more assistance to use their wealth appropriately through retirement?
“While those who take regulated financial advice are well catered for in retirement, millions of people in the UK who don’t take advice also need help making good decisions about their finances.
“The challenge posed by this advice gap is well acknowledged in the UK, and a joint review being carried out by the Treasury and the FCA could help improve guidance and increase take-up of regulated advice.
“The ultimate aim needs to be ensuring everyone, regardless of their means, has access to sufficient help, information and ideally advice to make sensible choices both when saving for retirement and turning their pension into a retirement income.”
