Government think tank the Centre for Policy Studies has published proposals for a radical rethink of pension savings and tax-incentivised saving in Individual Savings Accounts (ISAs).
The five-point plan contains the following key suggestions for simplifying current frameworks for pensions savings:
1. There should be an annual cap on all tax-incentivised savings of £45,000, including a cap of £35,000 for pension savings. Tax relief should be at the saver’s marginal (i.e. upper) tax rate, offering some 50% tax relief to those earning over £150,000.
2. Savers should be able to access at least some of their pensions savings before retirement. This could be made workable by bringing the pensions and ISAs areas closer together. For instance, pensions saving using ISAs could be encouraged by offering retrospective tax relief at retirement on ISAs savings by re-nominating them as pension savings. Also, existing savers should be allowed to take 25% of their pension savings before they retire.
3. Partners should be allowed to use each other’s pension pots for pensions saving while at the same time receiving tax relief, irrespective of their own earnings circumstances.
4. Unused pension savings could be bequeathed to other family members’ or third parties’ pension schemes, free of Inheritance Tax (IHT). This would encourage pension saving by allowing wealth to cascade down the generations, and strengthening the sense of personal ownership of pension savings.
5. Auto-enrolment under the government’s plans for pensions in the National Employment Savings Trust (NEST) scheme should be extended to include pensions saving in ISAs. This should appeal in particular to younger savers, who could feel that their longer-term or pension savings were working hard for them, without being ’locked away’.
“[The report] also describes steps towards sweeping away the two-track pension/ISA tax relief regime and replacing it with a single, unified tax framework, on that is easy to understand and attractive to long-term savers. Such a radical simplification is a prerequisite to encouraging more people to save more, and it would, for example, enable the industry to offer customers a simple savings continuum, perhaps under a ‘lifetime savings’ banner,” said the Centre for Policy Studies.
