Pensions: scrap lifetime allowance and bring in 33% relief for all, says stockbroker

25th September 2015


The chancellor has been urged to scrap the cap on the amount a person can save into a pension in their lifetime and introduce a ‘lifetime pension’.


Stockbrokers Interactive Investor has set out a four-step plan for reforming pensions ahead of the closure of a consultation on the future of pensions next week.


It was the chancellor to consider creating ‘lifetime pensions’ which operate in the same way as defined contribution pensions and attract employer and employee contributions. However, this pension will travel with you from job to job and allow investors to view workplace savings as ‘something you own, not just something you have’.


It also wants the removal of the lifetime allowance, which will fall to £1 million next year, to ‘allow investors to take more risk and benefit from earlier contributions and compounding, without fear that they might breach a cap’. The company argued that the £40,000 annual allowance already acts as a limit to overall tax relief on pension contributions and ‘having both is unnecessary and off-putting’ for savers.


Interactive Investor also wants a shake-up of tax relief on pension contributions, which is currently paid at the saver’s top rate of income tax. It wants a 33% rate for everyone regardless of income, a rate it said would be tax neutral.


Savers are keen for change as just under a third want to keep the current form of marginal tax-relief, despite the fact that many of these investors are likely beneficiaries of the current system.


Adam Seale, chief executive of Interactive Investor, said simplification is essential to the success of pensions and that a flat rate would incentivise more people to save.


‘Putting aside their own interests and looking at the wider picture, our investor poll results reflect our own view, that the system needs to change. We need to simplify a complex pensions system and incentivise those who are currently not saving enough for their financial future,’ he said.


‘Simplification of the current system has the potential to significantly increase participation and engagement. Differing rates of tax relief, lifetime allowances, annual contribution limits and the multitude of terms that describe and apply to pensions all discourage engagement at present.’


He added that moving to flat rate of 33% ‘would provide a strong incentive to those who don’t currently contribute, but still leave considerable benefits for higher-rate taxpayers too’.


He argued that this would encourage those who are not saving to do so and ‘attract engagement with younger investors with the associated benefit of longer-term compound returns’/


‘If all investors appreciate the benefits of pensions, in particular the compounding effect of up-front tax relief, then the decision on whether to invest in a pension or an ISA would become much clearer,’ said Seale.

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