Out-Law News 2 min. read
19 Aug 2015, 5:33 pm
Speaking as the company published its interim mid-year results, Phil Loney of Royal London warned that such a change "could pose considerable risk to the government's aim of creating a savings culture in the UK". He said that savers were unlikely to believe that the government's preferred option, under which pension contributions would be taxed at source and withdrawn tax-free on retirement, would continue unchanged "given the volume of changes to the pensions system over the last 25 years".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," he said. "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," he said.
The UK government published a 'green paper' on pension tax alongside the Summer Budget, and is seeking views on the case for incentivising pension saving through potential reforms to the tax system until the end of September. Among the proposals included in the paper is the introduction of a 'taxed-exempt-exempt' system, under which pension contributions would be made from taxed income but investment growth and the payment of benefits would be free of tax.
Currently, pension contributions by both individuals and their employers are made free of tax at the point that they are paid into pension schemes, subject to an annual and lifetime allowance. Employers are also exempt from national insurance contributions (NICs) on workplace pension contributions. Any growth in the value of those pension contributions is also free of tax, subject to the lifetime allowance. Pensions in payment are taxed as income, but individuals can take up to 25% of their savings as a tax-free lump sum on retirement.
Since April, members of defined contribution (DC) pension schemes have had more freedom to access their savings in any way that they wish once they turn 55 without incurring heavy tax penalties. The change has resulted in a dramatic reduction in the number of annuity products sold. Phil Loney said that Royal London had been one of the "beneficiaries" of the changes, as it has historically specialised in drawdown products rather than annuities. Sales of its 'Income Release' drawdown product increased by 61% in the first half of the year, according to its interim results.
"The way that these reforms were introduced with a Budget day announcement in 2014, but scant detail and a year to implement, created pent-up demand in the market," Loney said.
"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 savers understand and have confidence in," he said.