I read a startling fact recently. The first person who is going to live to 150 years old is already alive today. Think about that for a moment. That is potentially 75-plus years in retirement. If that person is in this country, either the state is going to have to pick up the bill for this incredible feat of longevity or that person’s savings are going to have to cover it.
This is an extreme case, of course, but according to figures from the Office for National Statistics, a baby born in this country today has a one in three chance of living to 100. That’s potentially decades in retirement for millions of people.
It got me thinking about the upcoming announcement around pension savings. On 16 March, the chancellor is due to stand up in the Commons for the Budget and the smart money says he’ll make some kind of major reform to the way pension saving is incentivised. Given that the general trend is that we are living longer, we need to improve the incentive for people to save for their future. It is widely accepted that, as a whole, we are not saving enough for our futures, with affordability usually cited as the number one barrier to saving more. Given that, making sure the system provides the most effective incentive for people to save is crucial.
I have made no secret that I believe there is room to make changes to pension tax relief. I would like to see fairness brought to the system with a flat rate for all savers, no matter what their salary. It often comes as a surprise to people when they hear that, the more you earn, the more the government puts into your pension. If you are a basic rate taxpayer (i.e. you earn less than £42,000 a year), to get £100 of pension saving, you must put in £80 and the government will top it up by £20. But if you are an additional rate taxpayer (i.e. you earn over £150,000 a year) then to get the same £100 in your pension pot, it only costs you £55, with the government offering a top-up of £45. This is unfair as only one in seven higher rate taxpayers go on to be a higher rate taxpayer in retirement. In 2016, when fairness is so high on the public agenda, that just cannot be right.
I believe a move to a flat rate of pension tax relief would also lead to increased engagement between savers and their pension. Our “save two get one free” model is simple and effective. People will understand that, for every £2 they save, the government will top it up by £1 and that should increase saving levels. That’s why I have previously called for the term “pension tax relief” to be dropped. Call it what it is, “the government’s contribution to your pension”.
So when the Budget is announced, what are the options?
There could be no change. This is unlikely as the government is keen to address the pension tax relief bill, which now stretches into the tens of billions of pounds every year.
There could be a flat rate of tax relief. That means everyone gets the same level of incentive to save. As I have explained, this would finally bring fairness to a system which has been stacked against lower earners for too long. Some people have argued that a flat rate would end up in double taxation for higher earners, but the reality is that this is only possible for people with savings well in excess of the lifetime allowance.
Another idea is to do away with pensions and introduce pension Isas instead. This would mean that you aren’t allowed to put any savings into a pension without paying tax on it first, but then withdrawals in retirement would be tax free. For millions of people, this system would involve paying more tax overall and having smaller pension pots when they come to retire. And unlike existing Isas today, you wouldn’t be guaranteed instant access to your money if you were pre-retirement.
There is little support for a pension Isas system among the public. Research we carried out found that only 37 per cent of people backed the idea, but that figure then almost halved when people were informed that, in most cases, they would end up paying more tax.
Pension Isas throw up another challenge. To get tax free withdrawals in retirement, savers have to put their faith in chancellors of the future, hoping that they won’t later decide that taking a bit of tax from retirees is a valid revenue stream. Our research showed that only 19 per cent of people – one in five – have that level of trust in government. The problem is that, when people don’t trust the outcome, they are less likely to save through this system, compounding the problem of under-saving in Britain today.
The coming weeks present an opportunity to make the pension system fairer and more sustainable. It is an opportunity to help people truly understand the value of saving for retirement, appreciate the support they get from government to do this, and to create a savings legacy that will last for generations to come. It is an opportunity not to be missed. Now is the time to bring fairness to pension savings.