11th September 2015
Support for a pension-ISA hybrid may have grown but only until the tax implications are explained.
A survey by Aviva has found that support for an ISA-style pension wanes when people realise the tax advantages of a pension.
Under a review of pension, the government is considering switching from the current pension model, where contributions are exempt from tax along with growth in the pension but withdrawals are taxed (EET), to the ISA system where contributions are from taxed income but growth and withdrawals are exempt (TEE).
Before understanding the implications of the tax change, 41% of those surveyed initially opted for an ISA-style system but once it was explained that people would end up paying more tax, just 23% were keen.
Under the ISA rules, 100% of contributions are subject to income tax and national insurance but under a pension, NI is not payable on employer contributions and income tax is only payable on 75% of benefits withdrawn (as everyone is entitled to take 25% of their pension as a tax-free lump sum).
The number of people who said they were in favour of the current system of tax relief on pensions increased from 20% to 34% when it was explained to them.
Andy Briggs, chief executive of Aviva UK, said: ‘Our research again shows that people are confused. Pensions and the tax system around them can be difficult to understand and that can act as a barrier to people saving more for their retirement.
‘The figures show that two-thirds of people didn’t realise that a t least £20 our of every £100 in their pension comes from the government.’
He added that Aviva was calling for the tax relief system ‘to be made fairer and simpler’ to reduce the confusion.
‘We need to remove different rates of relief for different incomes and offer everyone a flat rate of 33%,’ said Briggs.