The Government has now finished consultation considering how pension taxation could possibly work going forward. George Osborne, says he expects to disclose the findings as well as the direction he is intending to take in the March Budget. But could there be a way to have an advance glance at the situation? What’s the Chancellor thoughts and just what might his final decision be in?
Whilst there aren’t any certainties regarding this, Scottish Widows has highlighted several key ingredients it feels may make the system a success. These ideas could possibly make it into the consultation, so it’s this type of thing that the Chancellor could well be deliberating over, even as we type!
Companies must continue to be favourably incentivised to play a main role.
Employers make up 80% of investment into our pension system (not including State Pension), where NI Contribution (NIC) relief incentivises employers to be considerably more generous than the law stipulates and can encourage employees to invest more to be able to unlock higher amounts of employer contribution.
Pensions should provide a better return when compared with any alternatives.
Within any fresh system you will have winners and losers when compared with the existing system. However, it is mostly irrelevant when the old system is no more. Whether someone will invest money over time for retirement or not is dependent upon the extent that it is more advantageous to do so above other savings possibilities such as including ISAs or rental property.
Incentives will need to apply to both the employed as well as the self-employed.
Whilst employer contributions make workplace pensions appealing to the majority of employees, there is certainly less motivation for the self-employed, who constitute 15% of the workforce. An up to date system must provide similar benefits for the self-employed.
Tax relief needs to be advertised and valued.
Scottish Widows Research revealed that only 15% of individuals completely understand the present pension tax system. Those in ‘net pay’ schemes have the lowest level of understanding; many were not aware of any tax relief being received. Moving all plans and products to work on a ‘Relief at Source’ basis makes relief more noticeable plus a re-branding of tax relief to state a ‘Government Incentive’ could aid in far better promotion and improved appreciation.
A basic message that relates to everyone.
With an ISA, it does not matter what you do, there’s a straightforward annual allowance that relates to everyone, annually. In pensions, the complicated connection between yearly allowances, life time allowances and tapers, stop Government, employers and also the pension providers from successfully promoting a straightforward message which applies commonly.
The system should really encourage women and men to behave sensibly at pension age.
The existing tax arrangements behave as a mechanism that prevents people taking their whole pension pot early and using it too soon. When individuals use their pension pots too soon it places further burden on taxpayers to support them, therefore any kind of new system should consider a suitable braking system.
Provide reassurance regarding double taxation.
People will be sceptical of saving via a vehicle where they might bare tax on the same cash several times. This might be the situation where someone’s marginal tax rate changes in between the stages of investment and retirement. A wisely created system should deal with this possible issue. Additionally, there is a concern that any future Government may be pushed to tax retirement savings when in times of economic requirement, however this may be addressed by guaranteeing savers that in these severe circumstances, pension income will be at no more risk from tax than other types of savings.