MSE Blog: How the Government wants to encourage pension saving

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Read MSE Will's full blog: How the Government wants to encourage pension saving

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fairleads

i feel the main reason the gov.uk is pushing the pension issue is to move more of the working population above the benefits threshold in retirement thus reducing the overall cost of welfare. i would go as far as to say that the main beneficiaries of these new pension initiatives will be the financial services industry.

LHW99

1. To encourage pension savings I would suggest tax-free on the way in, as now, is best as the 'reward' is instantly visiblt. Pensions are much longer term than ISA's so tax-free on the way out will be a long way in the future for many. 2. For limiting costs to the Government, presumably some kind of limit on the annual or total tax-free amount invested (or on the level of tax refund eg basic rate only) would have to be considered. 3. In conjunction with point 2, I would suggest the lifetime limit on the amount that can be put into a pension could be abolished, if there is a limit on the amount that can be put in tax-free. Then if growth happens to take the fund over some notional value you don't get caught in the lifetime limit trap.

EdSwippet

Regardless of lip-service, I don't think the government particularly wishes to encourage pension saving. Its past actions -- for which there was no consultation -- speak louder than its rhetoric.

What it wishes is to give the appearance of consulting on ways to encourage pension saving as a smoke screen to justify actions that will save it money, and which probably will be to the long-term detriment of the pension saver.

Spidernick

Hmm, isn't that the pension consultation that ended on 30 September? If so, then this article has rather missed the boat.

The government certainly isn't encouraging everyone to save for a pension, quite the opposite at the top end in fact, where for some people the annual allowance will just be £10,000 come 6 April 2016.

greenglide

The government certainly isn't encouraging everyone to save for a pension, quite the opposite at the top end in fact, where for some people the annual allowance will just be £10,000 come 6 April 2016.

In practise people who pay the higher rates of tax are unlikely to end up on means tested benefits in retirement so it "isnt an issue", certainly so far as those who have never had the "opportunity" to do so.

I assume that they are referring to people who or on average or lower incomes?

Playing_with_Fire_2

The thing that is stopping me saving more in a pension is that I don't trust the government not to mess about with how and when I can access it.

I think they should trust that people who have saved money away until they're 55 will spend their own money in a sensible way.

There are loads of reports of underemployment in people below the state pension age who want to work. Whether it's because of ill-health, discrimination or the demands of the job, I don't want to be unable to work and unable to access my pension because some people who have only worked in offices assume I can still work until I'm 80.

If pensions moved to taxed on the way in I don't see why I'd bother to put any more in to my pension. I'd be handing over control of my money for no benefit.

maximumgardener

Playing_with_Fire wrote: »

If pensions moved to taxed on the way in I don't see why I'd bother to put any more in to my pension. I'd be handing over control of my money for no benefit.

I agree....100%

robin61

This constant tinkering with pensions cannot be giving people the confidence they need to have to invest in the long term.

Even if tax relief on the way in remains it apparently looks set to be at the same rate for everyone (around 30%). So a basic rate tax payer in effect could be getting a tax credit and a higher rate taxpayer only partial tax relief. I'm all for level playing fields but surely that should also mean everyone also paying the same rate of tax ? If not I see nothing wrong with people getting tax relief at the rate they actually pay tax.

I also wonder how this would work for smart pension and AVC schemes which operate on a kind of salary sacrifice basis. So really the individual isn't making the contribution - it's the employer. Surely that couldn't just be unpicked at the drop of a hat ? How long would it take to change this in practice ?

If they end up with this pension ISA where you get no tax relief at all and a promise of no tax later on your income. Who in their right mind would trust a government in 20, 30 or 40 years time to honor that promise ?

Paul_Herring

LHW99 wrote: »

To encourage pension savings I would suggest tax-free on the way in.

The trouble is (simplistically, of course,) except:
1) For the 25% PCLS and
2) If the person would be on a lower tax band in retirement than they were while contributing

It's a zero sum game whether it's taxed on the way in, or on the way out. Suppose someone has £100 gross to put into a pension, it increases 5% each year, whereupon it's withdrawn (no PCLS for this slice of £100):

Current scheme (EET):

year 0: £100,
1: £105
2: £110.25
3: £115.76
4: £121.55
5: £127.63
Withdraw: : £102.10 (£127.65*80%)

Proposed scheme (TEE):

year 0: £80 (100*80%),
1:£84.00
2:£88.20
3:£92.61
4:£97.24
5:£102.10
Withdraw: £102.10.


Of course, to make the first more realistic, lets take into account the PCLS on EET:
£127.63 * 25% = £31.91
Remainder * 80% = £76.58
Total: £108.49 (gain of £6.39)

Paul_Herring

Spidernick wrote: »

Hmm, isn't that the pension consultation that ended on 30 September?

It is indeed:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/442160/Strengthening_the_incentive_to_save_consultation__web_.pdf

4.3 Responses to this consultation should be received by Wednesday 30 September 2015. Please ensure that responses are sent in before the closing date. The government cannot guarantee that responses received after this date will be considered.

Playing_with_Fire wrote: »

I think they should trust that people who have saved money away until they're 55 will spend their own money in a sensible way.

55? Potentially not if you're under 41 (born in or after 1973...)

The "private pension age" will rise from 55 to 57 in 2028 and will then be linked 10 years below the state pension age, which is already due to be linked to longevity.

And yes - that's talking about the age at which you can access your private pension, (but subsequent reports indicate it may have been -at least temporarily- ditched.)