UK - Pensions and Individual Savings Accounts (ISAs) should be brought closer together through tax harmonisation and auto-enrolment into ISAs in an effort to boost long-term savings in the UK, a report from the Centre for Policy Studies has argued.
Michael Johnson, a pension and saving policy analyst and author of the report Simplification is the key: stimulating and unlocking long-term saving, claimed two differently taxed businesses - pensions and savings - were competing for the same client base where the landscape for long-term savings was already very complex.
He argued fewer savings resulting from the current complex tax and product regimes meant less long-term investment and lower economic growth over the long term.
Johnson put forward 16 measures that could help simplify saving and improve flexibility by bringing ISAs and pensions closer together.
In addition to a unified tax framework for the two types of product, he proposed a contribution limit of £45,000 a year for all tax-incentivised saving, of which £35,000 would be the maximum contribution to a pension.
The proposals from the Centre for Policy Studies, a think-tank established to promote the principles of a free society, also include allowing people the opportunity to withdraw up to 25% of their pension savings tax free before pension age.
This sum would then be deducted from the 25% tax-free entitlement at retirement.
Other recommendations included allowing income from annuities purchased with ISA funds to be exempt from income tax and allowing unused pension assets to be passed to third parties, up to a limit of around £100,000, provided they be invested in a pension in an effort to “reinforce a sense of personal ownership of pension savings”.
Johnson also argued that because people have been shown to prefer saving in ISAs rather than pensions, the new auto-enrolment regime scheduled for 2012 should be broadened to allow auto-enrolment into ISAs.
The report stated people would be less likely to opt out of a product they liked, although compulsory employer contributions under auto-enrolment should initially be restricted to pension funds.
However, it conceded that if auto-enrolling in ISAs proved attractive, the product could be included as “an alternative” for compulsory employer contributions.
Under the forthcoming pension reforms including auto-enrolment into a pension scheme, employer contributions will be phased in from 2012 to reach a maximum of 3% of banded earnings to combine with 4% from the employee and 1% tax relief.
Johnson also outlined four alternative tax-relief structures to harmonise pension and savings, which he claimed could save the Treasury as much as £8.5bn a year.
However, the report noted: “It is hoped these proposals will attract cross-party consensus. That said, it is recognised this will not be easy, as many view tax relief, for example, as an instrument of social policy.”
Commenting on the report, Gary Shaughnessy, UK managing director at Fidelity International, said: “The new government has a lot to consider at the moment, but we sincerely hope they will heed the advice from industry professionals when it comes to making important decisions that could materially impact prudent long-term savers in the UK.
“There is not only a growing sentiment the UK savings and pensions systems need to be simplified and more done to encourage people to save for their futures, but also an emerging consensus on how this can be achieved.”