Pension schemes can seem like a minefield to most people. We believe that pensions should be kept as simple as possible and this includes the way that people are being encouraged to save. In 2015, the Treasury published a paper looking at ways to encourage people to save more into their pensions. The former Chancellor, George Osborne, started this consultation to find out whether changes to the existing pension system could incentivise people to save more into their pension schemes. The purpose was to determine whether there were any better ways than the current system, which included looking at the amount of tax relief for different tax rate payers.
The need for better pension incentives
As the amount of tax relief received on your contributions is linked to your income tax rate, the current system favours higher-rate taxpayers. Incentives for additional-rate taxpayers have changed due to the new annual allowance – however, could there be a better system for basic tax rate payers? If the current system was simplified, would this lead to an increase in people saving more into their pensions? The government consultation raised questions around whether a simpler system might encourage people to take more responsibility when it came to saving enough money to fund their retirement, and this included better ways to plan for when people start using their pension savings.
As a financial planning firm, we welcome this consultation; we are firm believers in the creation of robust retirement plans that incorporate pension savings. Our aim is to help people achieve a comfortable or luxurious retirement, so we believe that simplifying the existing pension system could be highly beneficial for everyone in the long run.
Controlling your own pension pot
Due to a growing population and a dwindling state pension, the government is fully signed up to encouraging individuals to create suitable plans for their retirement. When the consultation paper was published, Osbourne said, “The government’s interest is in a lasting system that stands the test of time.” However, unless the system is changed to make it easier and more incentivising for people to save into their pension pots, such government aims may fall short.
“If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.” Former Chancellor, George Osborne
At the time, the government pension consultation received a lot of feedback from think tanks, financial firms and individuals, and it was proposed that changes to tax relief might be on the cards. However, asides from the “pension freedoms” which were brought in at the start of the financial year 2015/16 and a new tapered allowance for additional-rate taxpayers, little has changed to incentivise people to save into their pensions.
In a recent report published by the Royal Society of Arts called ‘Venturing to Retire’, it was proposed that only radical changes to the pension system would increase long-term savings, especially the retirement security of the self-employed, who are not included in the current auto-enrolment regulations. The Royal Society of Arts are considered thought leaders when it comes to areas such as pensions. They highlighted the fact that most self-employed people are using property and business assets as their retirement strategy, as well as relying on their partner’s pension scheme. The self-employed seem to be excluding pensions from their retirement plans for, which is very worrying indeed.
“No challenge is more acute than their lack of preparation for retirement. The self-employed are excluded from auto-enrolment and they have no employer to top up their pension contributions. While the proportion of employees making payments into a personal pension leapt from 51 per cent in 2010/11 to 62 per cent in 2015/16 (largely owing to auto-enrolment), participation among the self-employed fell from 23 per cent to just 17 per cent.”
Source: Royal Society of Arts – ‘Venturing to Retire’
The lack of incentives for the self-employed to save into a pension scheme is a growing concern for the government. The Royal Society of Arts report suggests that instead of using a ‘multi-tiered’ tax relief system, the government would be better off implementing a single flat-rate at 30%, which could lead to as many as 75% of pension savers being better off. Of course, this would not be a simple system to implement, especially as this would have a big impact on defined benefit pension schemes. However, the Royal Society of Arts also stated if the government reduced the annual pension allowance, this might help with any changes to the system.
Many financial firms and economists have argued that if all pension savers had the same tax relief rate and allowances, more people would be incentivised to save into their pensions.
At Balance: Wealth Planning, we believe that a fairer overhaul of pension tax relief needs to happen sooner rather than later.
If you need a pension review, please get in touch and speak to one of our financial planners. We will look at your existing pensions and your projected pension income, and help you create a suitable pension strategy for a better retirement.
