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www.cps.org.uk
What future pensions?
2 December 2014
Michael Johnson Research Fellow, Centre for Policy Studies
2
Central projection for PSND to GDP (%)
* OBR’s Fiscal Sustainability Report July 2013 ** OBR’s Fiscal Sustainability Report July 2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
99% in 2062 - 63
66% low
(mid 2030’s)
Ratio excluding
impact of ageing
population (approx.)
53% low
84% in 2063 - 64
2013 2014
PSND: April – Oct £60.5 £65.7 +£5.2 billion
Savings (2012) and demographics
Population aged 65+
UK Japan
1950 10.7% 4.9%
2010 16.5% 22.6%
2050 22.9% 37.8%
OECD; National Accounts at a glance 2014. Definition for HNSR: the ratio of household saving (plus
the change in net equity of households in pension funds) to household disposable income.
Household net Net debt
saving rate as % GDP
Greece -14.6% 102%
Japan 0.8% 140%
United Kingdom 2.4% 69%
Italy 3.6% 113%
Netherlands 4.1% 42%
Spain 4.4% 60%
Canada 5.0% 59%
Ireland 5.2% 83%
United States 5.8% 100%
Norway 8.2% -167%
Germany 10.3% 50%
Australia 10.4% 27%
France 11.7% 70%
Sweden 12.2% -24%
4
Costs of an ageing population
+ Stagnant productivity growth
+ Negative real earnings growth
+ Rising interest rates (2015+ ?)
= Fiscal squeeze
+ Approaching saving tipping point
= Diminishing supply of domestic capital
Cost of capital to rise
We need a savings culture
The squeeze is on
Impact on
personal debt?
Tax relief, 2012-13, £ billion
£270 billion of cash since 2001-02
HMRC; Table PEN 6: Cost of Registered Pension Scheme Tax Relief, February 2014
Up-front tax relief on employer contributions £21.3
Up-front tax relief on employee contributions £6.7
Tax-exempt 25% lump sum at retirement (approx.) £4.0
NICs relief £15.2
Untaxed pension products' income £6.9
Total £54.1
less pensioner income tax £11.5
= net cost to HMT £42.6
6
Not deferred tax:
Many 40%’ers only pay 15% i/c tax…........decades later
Tax relief: inequitable distribution
Income tax is progressive..
…..so tax relief is regressive
Income
decile
% of total
tax relief
Corresponding
annual income*
Bottom 1%
2 1%
3 1% < £23k
4 2%
5 3%
6 4%
7 6% £23k
8 8% to £45k
9 17%
Top 58% > £45k
Top 1% 30% > £100k
Top 0.5% 22% > £150k
* approx
HMRC; Personal Incomes Statistics 2011-12, January 2014
7
Savers’ behaviour
Denmark: DKr1 spend……
…….for DKr0.01 rise in total h/hold saving*
UK?............The Great Trade……..EET to TEE
Active savers (15%) Passive savers (85%)
Behavioural
driver
Save anyway: alert to
seizing tax incentives
Automatic (default) policies
harnessing inertia: AE
Impact on total
h/hold saving
Minimal increase:
savings reallocated
Significant increase
HMT cost Huge per capita Small
* Active vs. passive decisions and crowd-out in retirement savings accounts: evidence from Denmark; Chetty, Friedman, Harvard
University, Leth-Petersen, Nielsen, University of Copenhagen, Tore Olsen, Centre for Applied Micro-econometrics, Dec. 2013.
8
Tax relief: policy options
• Recent
• AA: £255k…….£50k…...£40k….?
• LTA: £1.8m….£1.5m ….£1.25m…..?
• 25% tax-free lump sum?
Savings
2012-13 £2.3 bn
2013-14 £4.4 bn
Post-tax £ tax relief
Flat rate contribution from HMT Pot total Communication
33.3% £100 £50.0 £150.0 £2 for £1 “free”
30% £100 £42.9 £142.9 £7 for £3 “free”
25% £100 £33.3 £133.3 £3 for £1 “free”
20% £100 £25.0 £125.0 £4 for £1 “free”
9
• Scrap all tax relief 50p per £1 subscribed
• Independent of taxpaying status
• Max. £4,000 from HMT: focused on first £8,000 savings
• Simple…… and highly redistributive
• £30,000 annual contributions limit
Tax relief: proposals to boost effectiveness*
* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, April 2014
10
Tax relief: proposals to boost effectiveness*
* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, April 2014
• 3 quid pro quos:
But……..Generation Y……..
1. Scrap LTA
2. Re-intro 10p rebate on dividends
3. £100k IHT exemption on transfers to pension pots
Generation Y’s perspective: ISAs?
Lifetime (ISA) savings agenda to emerge ?
Personal
pensions
Stocks &
shares ISA
ISA market
value
2007-08 £10.2 £10.4 £146
2008-09 £9.0 £9.7 £116
2009-10 £7.8 £12.5 £174
2010-11 £7.7 £15.5 £183
2011-12 £8.7 £15.6 £189
2012-13 £7.7 £16.5 £222
“Pension” does not resonate
Subscriptions:
(+ £220 Cash ISA)
11
12
• 4 ISAs + CTF = Lifetime ISA
• Cradle (+£500) to grave
• HMT incentive……shared with pension products
• Withdrawal rules: some ready access….to capital, only
• Tax treatment: pre-60 / post-60
• Nudges to promote default-based saving
• Default fund / income accumulation / AE
Time for the Lifetime ISA*
* Introducing the Lifetime ISA, MJ, August 2014
Lifetime ISA vs. pension product
Lifetime ISA Pension products
HMT 50p incentive Yes Yes
Pre-60 access Yes, but first repay 50p
per £1 withdrawn
Pre-55: none
60+ access Yes, taxed at marginal rate 55+: tax at marginal rate
Access to capital growth None until age 60, then Pre-55: none
& accumulated income taxed at marginal rate 55+: tax at marginal rate
Tax-free 25% lump sum No Yes
Charge cap on default fund 0.35% p.a. 0.75% p.a.
Interaction with m-t benefits Treated as capital Exempt
Part of estate for IHT ? Yes No
14
• Capital crisis coming
• Tax relief: the lowest hanging, juiciest fruit in Whitehall?
• The Great Trade
• Lifetime ISA to formally bring ISAs into retirement arena
• Chameleon, with saver in control
• What future private pensions?
Conclusion
www.cps.org.uk
What future pensions?
2 December 2014
Michael Johnson Research Fellow, Centre for Policy Studies