KPMG has warned that changes to the UK pension taxation regime currently under consideration at the Treasury will fail to plug the country’s £9trn (€12trn) savings gap.
The warning comes as the Treasury begins the process of weighing up responses to its recent consultation paper on pension tax reform.
The government launched the consultation in July and mulled a shift from today’s so-called Exempt-Exempt-Taxed model (EET) to a Taxed-Exempt-Exempt (TEE) approach.
Stewart Hastie, a pensions partner with KPMG in London, said the narrow focus of the debate on two approaches was “missing the point”.
“Both can be designed to solve the complexity and inequalities of the current system,” he said.
He also warned that any move to a new tax regime for retirement saving, particularly to TEE, would need at least three years – and ideally five.
At the moment, pension contributions are exempt from income tax and national insurance; so too is investment growth.
Pensions in payment, however, are taxed as income, although individuals have the option to take a 25% tax-free lump sum.
Under the competing EET or ‘Pensions ISA’ approach, both the individual saver and the employer would contribute to the retirement savings pot, as would the government through a top-up.
This top-up component would not be a substitute for tax relief. Instead, it would differentiate the pensions ISA from any other ISA product and replace the tax-free lump sum on retirement.
The government has said any reformed tax-incentive regime should be simple and transparent; allow individuals to take personal responsibility for making adequate retirement provision; build on the success of automatic enrolment; and be sustainable.
In recent years, the UK population has shown an increasing reluctance to save. Where people are saving, they are tending to save too little.
These concerns were recently highlighted in a brief joint study by the Association of British Insurers (ABI) and KPMG.
Among other sources, the report cited Scottish Widows’s estimates that 6.2m workers are failing to save anything towards their retirement – some 20% of the population.
The Department for Work and Pensions has warned that 11.9m UK adults are failing to save enough for an “adequate income” in later years.
The ABI and KPMG argued that regulation, government policy and the structure of the savings and investment management industry could all play an important role in closing the gap.
Since October 2012, the process of auto-enrolment has added 5m savers to the UK pensions landscape. A further 5m are tipped to join them.
“The question,” Hastie said, “is whether in this tougher environment the current system delivers value for money, meets the government’s policy aims and is sustainable.”
He also explained that it was quite challenging to get a true picture of the cost of today’s savings regime.
“Whatever the precise figure, the numbers are sufficiently big to be a driver for review,” he said.
“The Treasury should focus instead on what is necessary to incentivise adequate retirement saving in line with the policy aims.”
Wherever they stand on the issue, experts in the field take the view that any change to the taxation regime around retirement saving will produce both winners and losers.
“The current system essentially has a top up, but it is weighted toward higher-rate taxpayers,” Hastie said.
But, he said, either system, whether EET or TEE, could be designed to create a more equitable outcome across taxpayers at all levels.
“It all comes back to how much money we are prepared to put into retirement funding,” he said.
“A lot of the debate has been quite emotional about the form rather than the level of incentive, which is the key driver of what the individual gets when they retire.”
Meanwhile, Towers Watson broadly came out against any move to the EET-based model.
Policy expert David Robbins told IPE that, although there were arguments both ways, there were nonetheless a number of advantages to taxing on the way out.
“First, you are not collecting tomorrow’s tax today,” he said. “Doing that when you know there will be more old people around seems a slightly risky thing to do.
“Today’s approach ameliorates one of the problems of an annual approach to income tax.
“Allowing people to defer tax payments to the point where they are paying lower rates of tax means that high marginal tax rates are better targeted on people with high lifetime incomes.
“Plus, there is also the danger the chancellor could tweak the top up by enhancing it or suspending it, so people have to guess whether now is a good time or a bad time to put money into a pension.”
Robbins also warned that there remained the risk that a future government would have to take a second slice of the cake and raise an additional tax on the way out.