Savings and Investments Policy project Pension Taxation Proposals Charles McCready, TSIP Programme Director

2 Overview The taxation proposals have been developed by members of the TSIP project and have been broadly supported by a broad church of leading industry players Key objectives underpinning solutions include: Adopt solutions that encourage greater levels of savings Target low and middle income families Build upon the formula of the troika of employee, employer and government all contributing to the pension pot Build upon the success of auto enrolment

A dozen themes 3 How the government presents pension tax relief The amount of pension tax relief Employer contributions Treatment of National Insurance on pension contributions Salary sacrifice Tax free investment growth Tax free cash Annual allowance Lifetime allowance Treatment of Defined Benefit schemes EET versus TEE Additional incentives

Matching – Buy 2, Get 1 Free 4 Consumer do not generally understand tax relief Government should change how it presents contribution into pensions Matching contributions having an important effect on saving behaviours The match is less important than the amount of the match Introduce a single rate of contribution – 33% Encourage higher rate tax payers to keep saving Enhance lower and middle income savers Buy 2– Get 1 Free !

Employers 5 Employee contributions continue to be subject to NICs Employer contributions NOT subject to NICs on either employer of employee contributions Keeping the NICs status quo is intended to keep nudging employers to contribute to pension schemes Employers have a critical role to play Change contributions to a benefit in kind Basic rate tax payers to get a 20% tax credit to offset employee income tax Higher rate tax payers to get a 33% tax credit

6 Salary Sacrifice and tax free growth Moving to a single rate of government pension contribution requires savings Salary sacrifice should be abolished or at least deterred in the future HMRC should classify salary sacrifice as tax avoidance Consider mechanisms to deter employers from facilitating salary sacrifice schemes by making them liable for NICs on employer and employee contributions Need to also catch long term salary negotiations that result in lower salary in return for higher pension contributions Basic rate tax payers unaffected Tax free growth within the pension continues as per today 

7 Tax free cash and allowances Tax free cash would remain in place Acts as an incentive to save over the longer term Reduces overall rate for higher rate tax payers Difficult to change and remain fair to new savers Reduce annual allowance to between £20,000 and £30,000 Introduce “use it or lose it” to encourage saving every year Reduction helps pay for single matching contribution rate £40,000 £20,000 Remove lifetime allowance on DC schemes Encourage ongoing savings into pensions Encourage executives to participate in same pension scheme as employees £1,000,000 

8 DB schemes DB ring fenced and does not move to single matching contribution rate DBDC OLD NEW Significant operational complexity in applying single rate to DB Half of employer contributions are related to deficit reduction payments Public sector DB forms bulk of future accrual and it is the generosity of the employer promise that is the problem rather than the amount of the tax relief The factor for valuing annual accrual used to test whether an annual allowance charge is due, could be increased (following independent actuarial assessment) The annual allowance could be reduced but life time allowance retained Salary sacrifice could/should also be abolished

9 EET versus TEE TEE system considered and dismissed on the basis that it would:- o Make pension saving more expensive for both employers and employees and therefore reduce rather than strengthen the incentive for consumer saving o The removal of taxed withdrawals would remove the system control in place (tax) which helps consumer to spread withdrawals through retirement and make it last longer o The impact on public sector workers in DB schemes would be a significant pay cut unless mechanisms are introduced to have the tax paid from benefit accrual o A shift to future retired generations that do not pay income tax yet consume high levels of public services is neither equitable for younger generations nor sustainable o Less people working per retired person further increases burden on younger generations

10 Bonus contribution Concept of offering an additional contribution and nudging individuals to save more by creating a new “kink” point Bonus payment would be a flat monetary incentive e.g. £500 (per annum) Would require individual to hit a savings target e.g. 150% of auto enrolment target Introduces an element of competition to “get your bonus” Aimed at low to middle income wage earners Could provide a significant boost to low wage earner pension contributions Concept still being explored and refined