Conservative consultation document on savings and tax
The Conservative Party has just put out a consultation document on savings and tax and it has a fair bit about their likely policies on long-term savings should they form the next Government, so I thought you’d like to be aware of what they’re saying about pensions.
To start with you get all the usual stuff up front about the how much our savings ratio has fallen in the UK over the last seven years and how our figure of 5.5% compares badly with the European average savings ratio of 12%; how taxes have gone up rather than down; and how the number of people on means-tested benefits in retirement has grown so much that 46% of pensioners now qualify for the means-test, but by 2025 that figure will have risen to 64% and, even worse, will get to a staggering 71% by 2050 – and that at a time when there’ll be more pensioners than ever before, etc etc…..
All statistics that are depressingly familiar to those of us condemned to trawl forever through the sea of reports and consultation documents regularly churned out by Government and think-tanks alike. But I suppose we need to keep repeating them in case anybody is ever listening, I mean you never know, someone might decide to do something about it one day!
That’s what I scoured this Conservative Party consultation document for - what exactly are they proposing to do about these things, particularly as far as pensions are concerned?
Well, there are some pretty interesting things in the document that I think show that the problem is beginning to be understood. For a start, it proposes a number of new directions that could be taken to restore our pension system and, crucially, quantifies the costs that implementation would bring. As far as pensions are concerned, the big three ideas in the document are:
- Restoration of the dividend tax credit for pension funds; or
- Introduction of the so-called Lifetime Savings Account (LISA); or
- Introduction of new tax credits for employers who make pension contributions.
Restoration of tax credits
This is obviously a big issue and relates to the so-called stealth tax that has enabled the current Government to extract something like £5 billion a year from our accumulated pension savings of £1,300 billion. Put like that it doesn’t seem much, but £5 billion a year is a small fortune and to me has always seemed like a tax on saving. Many commentators and industry bodies have said that the imposition of this hard-to-understand tax has itself precipitated the pension crisis we are currently said to be enjoying and this is the first time, I think, that I have ever seen any political party say they would consider knocking it on the head.
The document acknowledges that by restoring the dividend tax credit that pension funds received before they were abolished in 1997, a future Conservative Government could make it easier for companies to fund the pension schemes they offer to their employees. But they do point out that much of the damage caused by this tax change has already been done in their opinion. They wonder whether schemes that have already restructured, say by switching from final-salary to money-purchase, would actually change back again if the dividend tax credit were now restored. This would be particularly unlikely, I think, as so many employers who have switched have taken the step of reducing their contribution levels at the same time, so I’m not sure there’s much that can be done about that through the tax system. Nevertheless, as far as the Conservatives are concerned this appears to be up for grabs and they want to know whether people think restoration of the pre-1997 regime would be a good thing.
Lifetime Savings Account (LISA)
This proposal, which we first heard about last summer, draws on two simple insights. Firstly that people may be put off saving for the long-term in a pension because it ties their capital up for decades and, secondly that matching contributions (like ‘Buy-One, Get One Free’ in supermarkets) is a more understandable and sexier way of giving incentives to savers than relief could ever be.
This, again, is an idea that is gaining ground and may well have general appeal, but it does come with its own difficulties and complications which, to be fair, the consultative document acknowledges. A fairly detailed appendix to the paper outlines some of the problems (such as people putting money in to get the matching contributions and simply drawing it out again) and I will put a link at the end of this BeeLine in case anyone wants to read through the whole thing.
Workplace Advice Credit
This appears to be based on the suggestion by the Association of British Insurers (ABI) that employers who are good enough to contribute to their employees pensions should be given some form of credit to enable them to employ independent financial advisers to perform regular ‘financial healthchecks’ for their employees in the workplace.
The document acknowledges that savings products tend to be sold rather than bought and that the current system acts against the provision of financial advice for many on economic grounds. The Workplace Advice Credit is designed to get around this problem affecting distribution.
If you’ve been reading BeeLines long enough you’ll know this is something I get pretty worked up about, the fact that we have a ‘distribution crisis’, rather than a ‘pension crisis’, and I’m pretty pleased to see ideas like this coming through if I’m being honest. Again, there’s a bit more about it all in the main document if you want to download it to read over your afternoon cuppa (or, if you’re like me, your Ayurvedic herbal infusion that you now drink having eschewed caffeine forever once again since 1 January. I don’t know about you, but I’ve still got a thumping headache sixteen days on which my therapist tells me is just my body reasserting control again after years of being drugged-up. I can’t see me keeping it up till Easter though, but I’ll let you know).
Anyway, if you want to download the Conservative’s consultation document you can get it by following the link here to the appropriate page on the Conservative Party website and then clicking on the link at the end of that page:
Oh, and enjoy your cup of tea…
17 January 2005
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