Industry says ISA-style pensions pose "considerable risk"

Royal London's chief executive, Phil Loney, has warned that an 'ISA-style' tax treatment of pension contributions is a "fundamental and far-reaching change" to the principles of pension savings, and could pose "considerable risk" to the Government's aim of creating a savings culture in the UK.

Related topics:  Retirement
Rozi Jones
18th August 2015
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In his Summer Budget, George Osborne said that pensions could be taxed like ISAs - paying in from taxed income and tax free to take out, receiving a top-up from the government in-between.

Speaking in Royal London's interim statement, Phil Loney said:

"There is no evidence that the promise of tax free income, 25-30 years into the future, would be believed by the public given the volume of changes to the pensions system over the last 25 years. Consequently, there is a real risk of a significant fall in savings, which are already too low in the UK. It would also create a parallel system which is wholly incompatible with people’s existing pension arrangements, would take years to develop and would increase the overall cost of pensions.

"We believe that it is vital to reform the current tax relief system to make long term saving fiscally neutral for all. The incentives need to focus on those with lower incomes, to create a more realistic and lower risk way forward. This could also enable the abolition of the lifetime allowance.”

When the Government first announced the potential changes to pension tax, industry experts argued that the move was a "radical step".

Stephen Green, senior consultant at Towers Watson, said:

“This policy will make it much harder for high earners to plan their pension saving. First, they won’t know their income until the end of the year, so won’t know how much they can save without incurring tax penalties. Second, cutting back on pension contributions to avoid penal rates of tax may not always be the right thing to do: it can mean losing matching contributions from the employer – though we expect that many employers will respond to this change by offering cash alternatives to affected staff.  
 
“High-flyers will now have to do more of their pension saving before their earnings peak – that is, when they have less disposable income. For people who expect to be on big salaries in a few years’ time, it could be now or never to save large sums in a pension."

Phil Loney added that when the pension reforms were introduced in 2014's Budget, the industry was offered "scant detail and a year to implement [which] created pent-up demand in the market".

He concluded:

"It is now clear that April’s deadline for the introduction of pension freedoms was far from the end of the Government’s pension reform agenda. We have been calling for a properly considered review of the incentives to save in a pension for some time. It is important that we have a settlement that is lasting, and one that that savers understand and have confidence in."

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