Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
As I have argued previously on this site, Britain’s main, underlying economic problem is that the savings rate has been too low for too long. This has led to under-investment, both private and public, causing poor productivity and “selling the family silver” – largely good British companies and utilities, plus both prime commercial and prime residential property – to fund a cumulative current account deficit over the last 20 years of some £700 billion. It has also led to citizens being under-provided for in their old age at a time when people are living longer, potentially putting burdens on the state and the taxpayer that are unaffordable.
The Tax Incentivised Savings Association, representing a pan-industry group of 15 leading Savings and Financial Services and Consumer groups, has spent the past twp years researching and developing policy proposals to enhance saving levels and designed to provide better financial security for lower and middle income families. They have just published their response to the Treasury consultation on pension tax relief, “Strengthening the Incentive to Save”. Its objective is to deliver a simple, sustainable, and attractive long-term solution for pensions.
The conclusions of their substantial research are:
- That the current system of pension tax relief is poorly understood by the public and thus provides only limited incentive to save.
- It needs to be replaced by incentives which are simple to understand and not subject to constant change.
- While personal freedoms as regards pension savings resonate well with the public, the actual act of saving itself is more effective via organised arrangements, such as auto enrolment and company schemes, rather than relying on individual responsibility.
While ISAs have been the one successful area of financial saving in the UK – and the concept of a pension ISA this strikes a favourable emotional chord – further examination of this option results in strong support for the existing pension savings structure. The Pension ISA approach (TEE system) would reduce the level of pension saving further and result in limited future tax revenues from the increasing numbers of retired people at a time when they are the biggest users of state benefits.
Moving to universal pension savings of eight per cent of remuneration is a step in the right direction, but higher contribution levels are needed to provide for an adequate income in retirement. The self-employed have a particularly acute need to increase their provision for retirement and require incentives specific to their circumstances.
TISA’s proposals are:
- A single, national rate of Government pension matching contribution for money purchase schemes with the State providing £1 for every £2 from the employee/individual – “Buy two get one free”.
- Salary sacrifice should be discontinued for the purposes of simplicity and savings to the state.
- The lifetime allowance should be scrapped for money purchase schemes, apart from anything else, to encourage successful investment.
- Annual allowance limits should be further reduced for both defined benefit and defined contribution schemes ,but tax free growth and tax free cash should be retained and are popular.
- Employer pension contributions should continue to be exempt from NICs.
- A new, self-employed pension scheme where the State will provide an enhanced level of matching contributions should incentivise, particularly, savings by the self-employed.
In aggregate, the proposals should save the Exchequer £2.7 billion a year. Britain has a long way to go where money purchase pension incomes are about half the level deemed adequate.
I found it particularly interesting that the results of TISA’s consumer research showed that 90 per cent of the respondents were prepared to contribute either per cent of their pay if the employer or Government put in another seven per cent, and 73 per cent believe that it should be compulsory to save into a pension, as has been the case for several years in Australia.
Also, approximately half the respondents of all ages advised they did not have a specific date in mind to retire. In practice, I believe many people want to continue working longer for the companionship as well as the money. The number of those over 65 continuing in work has increased substantially over the last decade. Interestingly, the total GNP generated by the additional number of people working beyond 65 is approximately equal to the total increase in the UK’s GNP over the last decade.