Calls for flat rate pension tax relief and NICs for post-retirement workers
The Resolution Foundation has published a comprehensive report by the Intergenerational Commission examining the experiences and prospects of the different generations in Britain.
Here are the top 10 takeaways:
1) Flat rate of pension tax relief, set at 28% to ensure “all pension contributions attract the same rate of tax relief regardless of earnings, providing an easy-to-understand increased incentive to save for low and middle-earners. This measure would be self-funding, with reduced tax relief for higher earners offsetting gains for lower earners”.
2) Pension triple lock axed in favour of a ‘double lock’. Since 2011, the state pension has risen by the highest of growth in earning, prices or 2.5%. The report stated: “The triple lock does a good job of boosting the value of the state pension relative to earnings. It is however a rather arbitrary and unpredictable mechanism, and its high cost – an extra £4bn relative to earnings uprating has helped put pressure on welfare spending for working-age adults”.
3) A £2.3bn ‘NHS levy’ via National Insurance on the earnings of workers above state pension age and limited NI on occupational pension income. “As well as raising funds for health services across the UK from better-off members of the group most likely to use them – four-fifths of revenues are drawn from the richest fifth of pensioners – this approach addresses inequities in the current tax treatment of pensions”.
4) Abolish inheritance tax and replace it with a lifetime receipts tax levied on recipients (rather than estates) with fewer exemptions, a lower tax-free allowance and lower tax rates. The report noted that IHT raises £5bn a year but given all the exemptions, eg between spouses, main residence etc, inheritances are rising fast but the tax revenues are projected not to keep up.
5) By scrapping inheritance tax, this would allow for a £10,000 ‘citizen’s inheritance’ to all young adults (from the age of 25) to spend on skills, entrepreneurship, housing and pension saving. The think tank expects this to cost £7bn a year.
6) Auto-enrolment earnings trigger to be cut to £6,000. Since 2013, more than nine million employees have been auto-enrolled into a workplace pension scheme. In order to be eligible, employees need to earn at least £10,000 a year from a single job. The report authors suggested lowering the AE threshold to the equivalent of working 15 hours per week on the National Living Wage – currently £6,000 a year.
7) Capping tax-free cash at £40,000. Pension freedoms allow savers aged 55+ unfettered access to pension pots with the first 25% being tax-free. The think tank said this should be capped at £40,000. “The typical lump sum taken is £20,000, but the fact that some individuals are allowed to receive tax-free six-figure sums is very hard to justify and heavily skews tax relief expenditure towards a minority of high lifetime earners,” it stated.
8) Develop a system that places requirements on firms and individuals contracting self-employed people to make contributions to their pensions and provide default routes via which the self-employed can save into pensions. Further, Statutory parental pay and contributory Jobseeker’s Allowance should be extended to the self-employed, at a cost of £100m, funded by narrowing the difference in the National Insurance treatment of employees and self-employed workers.
9) After three months of employment, those on zero-hours contracts working regular hours should have the right to a fixed-hours contract guaranteeing them the average of their weekly hours over the previous quarter.
10) Replace council tax with a progressive property tax with surcharges on second and empty properties. Halve stamp duty rates to encourage moving and a time-limited capital gains tax cut to incentivise owners of additional properties to sell to first-time buyers.
Reaction to the proposed reforms
Rachael Griffin, tax and financial planning expert at Quilter wealth management, said: “As we live longer, life stages are being pushed down the line and now nearly 1.3 million people are in employment beyond the state pension age. However, as the population rapidly ages, the nation also faces a social care crisis and it is only right that those who can continue to work are taxed like the rest of the population to ease the financial strain on society.”
Tom Selby, senior analyst at AJ Bell, said: “Some of the ideas, such as paying £10,000 to everyone over the age of 25, feel like gimmicks that will never see the light of day. Others would face severe practical challenges if they were to be implemented.
“There would be significant complexities to overcome in establishing a flat-rate of pension tax relief, particularly in relation to defined benefit pensions. Furthermore, any move to cap tax–free cash would need to be fair to those who have already contributed to a pension based on the rules of the existing system. It is also critical any attempts to address intergenerational fairness through the pension system do not inadvertently damage incentives to save in the UK.”
Tom McPhail, head of policy at Hargreaves Lansdown, said: “Bringing the self-employed into the pension system has become the holy-grail for pension policy right now. The first step is to give individuals choice of which pension provider their contributions are paid to. This would pave the way for the Resolution proposal for employers to make contributions for contracted self-employed labour. Employers enjoy flexibility in using self-employed workers, which is good for the economy however retirement savings are suffering as a consequence. Once individuals ‘own’ their retirement savings, getting an employer contribution as well would make all the difference.”