Are The Pension Reforms A Good Deal?
The government has been told off by the The Centre for the Study of Financial Innovation (CSFI), a non-profit think-tank, on the matter of pension reforms. The CSFI respectfully suggested that the government halted their plans for reforms altogether.
According to a paper recently published by the CSFI and dramatically titled “The Death of the Retirement”, the main contentious point in the government’s proposed overhaul of the British pension system was identified as the new tax regime that would govern it. Indeed,current tax incentives are based on the principle of tax-exempt contributions, tax-exempt investment gains and taxed withdrawals, known as EET. Conversely, TEE is shorthand for taxing savings at the front end, as happens when people use their taxed income to save into tax-free individual savings accounts (Isas).
Jane Fuller, CSFI co-director, said the government should reject the TEE formula “because voluntary, long-term saving (as in the new auto-enrolment regime ) needs the incentives of both an employer’s contribution and a significant tax rebate.” Baroness Altmann, the pensions’ minister, declared this week that a shift to treat pensions like ISAs could be “dangerous” for retirement savings levels. She added that if pensions were taxed like Isas they would be too easy to spend, or could be taxed by a future government.
As these flashpoints have been highlighted, the government retorted that their proposals were not final and that they were ready to review some of the policies’ content. As the paragraphs above have made clear, the tax structure that would accompany the pension reforms has been deemed inadequate by industry specialists. Where does that leave the government? And to what extent would they be ready to review their proposed policies?
They could of course stick to the current policies, but that would both be politically detrimental and economically unsustainable. The latter is of greater importance at present as the conservatives have vowed to cut budget spending and bring about fiscal orthodoxy to state finances. One way to accomplish this is to push for much-needed pension reforms, but as we have seen above, the solution the Treasury came up with is far from being optimal. Yet, their plans were not devoid of sense: the tax structure intended for the new legislation was designed to bring in revenue in order to compensate for tax cuts made elsewhere, which leaves the government in a delicate situation. The choice is therefore straightforward here. Either the government carries on with the reforms it initially put forth and commits to this damaging tax system, or the government proceeds to further benefits cuts in order to balance the budget. The truth of the matter is that neither option is desirable for the conservative party at this point in time.
The CSFI is right, the reforms should be halted. But they should be halted for the right reasons. That would be a careful rethinking of the approach taken to pension reforms and a new agenda for a leaner, tax-friendlier set of proposals.