Be bold...and start the great pension reform

ALTHOUGH we have yet to see concrete evidence of what the main political parties want to do with our pensions, there are plenty of experts with strong views on how a future Government can get us saving again.

Some of the proposals for reform are sound, others barking mad. What unites these disparate voices is a call for urgent change. It is hard to argue against such sentiment.

The Centre for Policy Studies and the Association of Consulting Actuaries are the latest to throw their two pennyworth of advice into the mix ahead of publication of the party manifestos.

Both have launched savings and pension wish lists and they make for interesting reading.

Those at the Centre are a freethinking bunch and were one of the catalysts for Thatcherism in the 1980s. In contrast, the Association is deeply conservative with a small ‘c’, but it brings to the table a depth of pension knowledge unrivalled elsewhere – just don’t invite one of their members to your next dinner party because guests will be asleep before you have served the hors d’oeuvres.

As you would expect, the Centre’s recommendations are as radical and left-field as you will find. Most controversially, it proposes a scrapping of pension tax relief in favour of a ‘bonus’ system that would be more egalitarian (hardly free-thinking).

It is an idea that was mooted when George Osborne was Chancellor of the Exchequer – long before he transmogrified into a journalist. But the impending Brexit vote meant it was put back in the drawer.

Pension contributions, the Centre suggests, should be paid from after tax income (not gross pay) in the same way we currently fund an Individual Savings Account.

Annual contributions (both employee and employer) would then attract a 25 per cent Government bonus up to a maximum £2,500. Any unused bonus could be carried forward and utilised in a future tax year (the Centre suggests a ten-year window).

The implications of this proposal are massive. Not only would it end higher rate tax relief on pension contributions but it would drastically reduce the annual allowance – the amount we and our employers can put into our pension each year – from £40,000 to £10,000. Its suggested scrapping of the £1 million lifetime allowance – the maximum value your pension fund can become before tax is charged on any surplus – becomes an irrelevance because nobody under its new bonus scheme would ever get the chance to build a £1 million pension fund.

The Centre also proposes that workers should be allowed to divert work pension contributions (plus the new style bonuses) into a Lifetime Isa and a new Workplace Isa. Until age 50, employee contributions would go into the Lifetime Isa. They would then be diverted into the Workplace Isa which would already be funded by the employer element of the contribution. The rationale behind this, says the Centre, is that it would build a stronger sense of personal ownership which in turn would encourage people to get more involved in building longterm wealth.

The Association’s manifesto is less radical. On reform of tax relief, it is as woolly as an unsheared Merino ram. All it says is that the parties should spell out precisely in their manifestos what reforms they intend to bring in and simplify the pension tax regime. There is no mention of abolishing tax relief or the introduction of a Government bonus system. But like the Centre, it does call for a scrapping of the lifetime allowance (hurrah) and the ‘tapered’ annual allowance that means additional rate taxpayers are now severely restricted in how much they can funnel into a pension.

The most ambitious proposal is its call for people to have early access to their pension pot (before age 55) so they can use the proceeds to fund a home deposit for a child. I also like its recommendation for a simplification of the Isa product – a proposal at odds with the Centre and its new style Workplace Isa.

What is blindingly obvious to all – bar politicians – is that pensions are now ripe for reform. Governments past and present have meddled away, turning a simple savings vehicle into a hydra that now deters most and is understood only by actuaries.

It is time for political boldness. Let’s shake up pensions once and for all, make them simpler, and get people saving again.

Mr Hammond, Mr McDonnell, declare your pension hand.

Governments past and present have meddled away – turning a savings plan into a hydra