Pensions & savings need a serious shake up
Our pension and savings system is vital for the long term prosperity of tens of millions of ordinary savers and investors. For some it has worked very well, however for others it still appears complex and difficult to navigate. Hargreaves Lansdown is publishing a manifesto for savers and investors. Comment Tom McPhail, Head of Policy.
It contains our proposals for the next government to develop a coherent, joined-up savings policy to give everyone in the UK the best possible opportunities to save and invest more of their money, and to do so more effectively. Tom McPhail, Head of Policy: “The next government should set a clear priority to encourage saving and investing for the whole population. It should put a stop to piecemeal policy-making and the salami-slicing of allowances; instead it should create a coherent, joined-up set of policies, with the goal of helping everyone to make more of their money, to invest for their future with confidence and to build a financially secure retirement.”
Individual policy proposals we are calling for include: Reform of pension tax relief to create more effective incentives for saving; Extension of the benefits of auto-enrolment to low-earners and the self-employed; Simplification of the ISA regimes; A strengthened obligation for the teaching of financial education in schools.
Tom McPhail: “On pension taxation in particular, we believe there is a once-in-a-generation opportunity to address some of the inequities of the current system and to create a balanced structure of allowances, incentives and rewards which would work for the whole population. Increasing numbers of investors feel government policy punishes those who want to do the right thing and provide for their future and that can’t be right.”
Pension tax relief costs the Exchequer £48 billion a year and is so complicated two thirds of people don’t understand how it works. An estimated 85 percent of the relief granted on pension contributions goes to defined benefit pension schemes, even though hardly anyone joining a new job today will be offered such a scheme. Auto-enrolment has brought over 7.5 million new pension savers into workplace pensions, yet only around half of adults (56 percent) are saving adequately for retirement.
Repeated tax raids by the Treasury have salami-sliced away at the tax breaks enjoyed by pension investors. Many of these tax raids have not only cost investors money, they have also made the system progressively more complicated. Changes such as the cuts to the Lifetime Allowance, the introduction of the Annual Allowance Taper and the intended cut to the Money Purchase Annual Allowance have all added more and more bureaucracy to the system. Among other proposals, Hargreaves Lansdown calls on all political parties to commit to: A reconsideration of tax relief, and the complex Annual Allowance Taper, the Money Purchase Annual Allowance, the Lifetime Allowance for Defined Contribution investors and net pay pension tax relief; A review of the tax relief treatment of final salary schemes; Stop forcing investors to change pensions when they change jobs; Legislate to make the pension dashboard mandatory; Extend the benefits of auto-enrolment to the self-employed and low paid; ISAs and non-pension saving; Consolidate and simplify the different ISA regimes
ISAs have been a popular and effective way for individuals to put money aside for the future. They combine flexibility with tax efficiency and simplicity. However the ISA landscape is becoming increasingly complex. There is now an unnecessary range of options for investors, forcing them to make choices. By making the product simpler and more accessible, the government can reduce costs and improve take-up. We call on the next government to merge all the different ISAs, including the Innovative Finance ISA, the Cash ISA, the Stocks and Shares ISA and the new Lifetime ISA into one single ISA regime. We believe all this could be achieved whilst preserving the house-purchase top-up element of the LISA.
The Government can do more than create tax allowances and limits. We’d like to see the promotion of financial capability become a legal requirement for all schools. We’re also looking to the government to appoint a savings champion and to develop a financial regulatory agenda for a post-Brexit UK.