Turn Pensions Into Savings Say British Savers
Retirement savers have signalled their support for radical government proposals to treat pensions more like individual savings accounts (ISAs) in a new poll that shows strong appetite for a simplified tax relief system.
When asked to choose the most appealing pensions tax system, only 27 per cent of working adults chose the current set-up, with the remainder choosing other options, according to the survey by PwC. The most popular choice, with 41 per cent support, was for the government to tax pension contributions but for pensions to be distributed tax-free upon retirement — the ISA-like option under consideration by the chancellor, George Osborne. Respondents said this would help them to plan better, as they would not need to factor in tax deductions in retirement. The ability to take a pension tax-free would be the most popular incentive to save more, according to the survey of 1,197 working adults. Only one in seven said the existing tax exemptions on pension contributions, which are combined with taxation at retirement, provided an incentive to save. Following changes to the details of pensions tax relief in recent budgets, 61 per cent of respondents said that they were put off pensions saving because “the government keeps changing how pensions are taxed”.
Almost as many respondents said they were deterred because they did not understand how much they needed to save and because the system was too complicated. Two-thirds of people were unable to identify the current system when given a choice. From April, pensioners have had far more freedom in how they use their pension savings, leading to a drop in sales of annuities and a move towards income drawdown products — changes to which the industry is still adapting. The government last month said it would consult on whether to reform pensions tax relief to “strengthen incentives to save, offering savers greater simplicity and transparency”. It is considering reversing the current system to create an Isa-style regime, but could also take less drastic steps such as altering the lifetime and annual pension saving allowances.
With more than 50% of the British workforce admitting that they do not fully understand the pensions system to which they contribute, it is evident that simplifying pensions in the UK should be a top priority for the government. Moving towards a streamlined system bearing a closer resemblance to ISAs would defintely be a good (albeit massive) step in the right direction. It is unlikely that the government will introduce sweeping refeorms in the wake of those that already have been promulgated but the concertations mentioned above should indicate a will at the government level to one day make the move. This arguably would not only postively contribute to healthier personal finance (assuming that people will look after their pensions more closely as a result) but also to better public finances. Indeed, if people get a better grip of their old-age funds, it can be expected that less will have to resort to live off state benefits to get by. What is at stake here, therefore, is no less than efficiency in the pension sector.