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Incentives to save must focus on a simpler solution than pension tax relief

10/07/2015

The consultation on pension tax relief announced in the Summer Budget focuses on four principles. The first of these is simplicity and transparency. 

Here are Old Mutual Wealth’s initial thoughts on this element of the consultation:

Old Mutual Wealth believes the consultation on pension tax relief is a once in a generation opportunity to do away with pension tax relief in favour of a simpler system of Government funded matching contributions.

The current system of pension tax relief is complicated and the majority (57%)* of people do not understand how it works.  It is set to become even more complicated with the new restriction on pension tax relief available to those with income over £150,000 coming into effect from the start of the next tax year.  Matching contributions based on the well-recognised concept of buy two get one free would be simpler, easier for people to understand and therefore more likely to encourage people to save more for their later life. This approach of repositioning tax relief as Government matching contributions into an individual’s pension was also proposed by TISA’s The Savings and Investments Policy project (‘TSIP’) in March of this year.

The consultation should therefore include consideration of a new format of matching contributions whereby everyone, regardless of the level of income tax they pay, receives a £1 Government contribution for every £2 that they or their employer contribute, subject to the annual allowance.  This would be significantly simpler and easy for people to understand and the behavioural impact of such changes on saving levels should be tested as part of the consultation.

In today’s terminology this solution would equate to a 33% flat rate of pension tax relief which increases the incentive for basic rate tax payers but is still an attractive incentive for higher rate tax payers.  The vast majority of people will be basic rate taxpayers in retirement, even if they are currently higher rate tax payers. So pensions would remain a very attractive savings vehicle, regardless of the tax paid on income.

The consultation will also need to consider the impact of such changes on auto-enrolment company schemes and salary sacrifice arrangements.  It should also consider the removal of the lifetime allowance to further simplify the pension system and test the behavioural impact of such changes on saving levels. The annual contribution allowance already caps how much people can save tax efficiently in pensions and so the lifetime allowance seems an unnecessary control.  It simply penalises good investment growth and is a further complication.

Steven LevinSteven Levin, managing director of distribution at Old Mutual Wealth, comments:

“The huge sum of money we spend on pension tax relief is probably not working hard enough to get people to save because they don't understand how it works.  It feels like now is the time to capitalise on the heightened awareness of pensions created by the new pension freedoms so the Chancellor is sensible to launch this consultation now.  A consistent incentive for everyone, based on a simple concept of buy two get one free, could significantly change the way people engage with pensions and increase savings levels.”

*YouGov/Old Mutual Wealth research – 43% of respondents understood that higher rate tax payers receive a greater incentive from the Government to save via pensions than basic rate taxpayers. Total sample size was 1023 adults. Fieldwork was undertaken between 11/03/2015 - 17/03/2015.  The survey was carried out online.

For more information contact

Tim Skelton-SmithOld Mutual Wealth02380 916 99807824 145 076tim.skelton-smith@omwealth.com

Notes to Editors:

Old Mutual Wealth is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Old Mutual Wealth oversees £131.3 billion in customer investments (as at 30 September 2017).

It has an adviser and customer offering spanning: Financial advice; investment platforms; multi-asset and single strategy investment solutions; and discretionary fund management.

The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.

Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.

Advice and Wealth Management encompasses the financial planning network, Intrinsic; Old Mutual Wealth Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Old Mutual Wealth’s multi-asset investment solutions business.

Old Mutual Global Investors (‘OMGI’) is the asset management business of Old Mutual Wealth with £39.8bn funds under management (as at 30 September 2017). On the 19th December 2017, Old Mutual Wealth announced that it has agreed to sell its Single Strategy asset management business to the Single Strategy Management team and funds managed by TA Associates. The proposed transaction is subject to customary closing conditions, including regulatory approvals. 

Following managed separation from Old Mutual plc, Old Mutual Wealth will rebrand to Quilter plc. Each of the businesses within the Quilter Plc group will be rebranded over a two-year period, with the exception of Quilter Cheviot, which will retain its existing name.

Old Mutual Wealth is part of Old Mutual plc, a FTSE 100 group that provides life assurance, asset management, banking and general insurance. Old Mutual is trusted by more than 19.4 million (as at 31 December 2016) customers across the world and has a total of £212.3 billion of assets under management (as at 30 June 2017).

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