Old Mutual Wealth is today urging the government to focus on ensuring a period of stability in long-term savings legislation, as data gathered from advisers shows that significant reform of pension tax relief could discourage saving.
The research also found advisers predict there will be limited uptake of the new Lifetime Isa.
It comes as the pensions minister, Baroness Altmann leaves government warning that “short-term political considerations, exacerbated by the EU referendum, have inhibited good policy-making.”
Richard Harrington will take on the role of pension under secretary.
Following the changes, Old Mutual Wealth is urging the government to take a measured approach to long-term savings policy, and consider introducing a standalone body to legislate in this area to help avoid short-term policy decisions.
Pension tax relief
Last year the government moved to consult on possible reform of pension tax relief, with widespread speculation that it could replace the current marginal-rate of tax relief with a flat-rate for all pension contributions.
Asked what effect they felt this could have, over half of professional financial planners said they believe that a flat-rate of pension tax relief could discourage higher and additional rate taxpayers from making pension contributions.
When asked to predict at what level a flat-rate might lead clients to feel pension saving was no longer worthwhile, 5% said clients would be put off by a 33% rate. At a 30% rate of relief, 16% said clients would be put-off. A 25% flat-rate would be enough to discourage savings according to 21% of advisers, while 17% said client pension contributions would drop-off at 20%.
It indicates that while a 33% rate may be palatable, objections to a flat-rate increase significantly as the level of tax relief declines.
And it leaves less than half (42%) who report that they believe clients are likely to continue to wish to contribute to pensions even if a flat-rate were introduced.
Q: Were a flat rate of pension tax relief to be introduced, at what level do you believe higher and additional rate taxpayers would feel that pension saving is no longer worthwhile (assuming relief continues to be calculated on gross contributions)?
Advisers also indicated they believed there would be limited client demand for the new Lifetime Isa.
Nearly half (46%) said they felt there would be limited interest. One third (33%) said there was likely to be moderate uptake and 5% expect high interest.
Only 5% predicted no interest and 10% remain unsure.
The Lifetime Isa offers support to first-time buyers looking to save for a deposit and can also be used as a retirement savings vehicle by those that have maximised their pension savings allowance. But it has been seen as a possible blueprint for a future overhaul of long-term savings.
And Old Mutual Wealth is calling on policymakers not to introduce reform without careful consideration of the future impact on savings behaviours.
Old Mutual Wealth pension policy expert, Jon Greer, says:
“Pensions have been through a major overhaul in the last few years with the expansion of auto-enrolment and introduction of pension freedoms, and now is the time for a period of stability.
“Prior to the EU referendum, it looked extremely likely that the system of pension tax relief could also be overhauled, with a flat-rate of tax relief and a move toward a pension Isa very much on the cards.
“Advisers have indicated that while savers may be able to tolerate a 33% flat-rate, representing a buy-two-get-one-free deal, more substantial cut-backs could be very damaging.
“Ahead of the referendum, the previous Chancellor, George Osborne introduced the Lifetime Isa, widely believed to be a compromise policy introduced with a view to phasing-in a pension-Isa system.
“While the Lifetime Isa will be a helpful savings vehicle for many people, there are major fears it will be used as a backdoor into a pension-Isa.
“I am very concerned there is a real risk that Treasury may be tempted to make short-term policy decisions designed to curb the cost of funding pensions, and that the Department for Work and Pensions will not be in a position to provide the necessary checks and balances to ensure that savings policies remain sustainable and secure in the long-term.
“I would urge the government to consider re-thinking the way it makes long-term savings policy decisions, keeping the process at arm’s-length from the DWP and Treasury and with a focus on ensuring savings legislation retains a long-term horizon and is not unduly influenced by party politics.”
*Data collected by Old Mutual Wealth from UK advisers in April and May 2016. A total of 219 respondents participated in the survey.