UK savings should be radically simplified says think tank

The Centre for Policy Studies think-tank says long-term savings are overly complex, with multiple tax regimes that deters people from saving.

Pensions and Isa’s should work together and people should be given access to their pension before they retire. They should also be able to leave unused pension savings to their heirs tax-free.

The report proposes introducing a single, annual contribution limit of £45,000. Within this limit, a maximum of £35,000 a year could be contributed to a pension – similar to the current cost to the Government of tax relief under existing pension savings allowances. Pensions tax relief would be paid at the saver's marginal rate, while savings accrued in an Isa could be transferred into a pension and benefit from tax relief of 20%. Nigel Peaple, National Association of Pension Funds director of policy, says: "We urge the Government to rethink the recent changes to pension’s tax relief, which will affect many others besides the high earners."

The Association of British Insurers (ABI) called for a new limit of £50,000 to be set as the maximum amount people could pay into their pension each year and receive tax relief at the highest rate at which they paid income tax.

The group said the limit would be easy for people to understand and simple to administrate.

It added that it would be seen more positively than current plans to reduce the amount of tax relief people earning more than £150,000 qualified for, which it claims undermines people's incentive to save.

Maggie Craig, director of life and savings at the ABI, said: "An annual limit will greatly help simplify the current system of tax relief for pension contributions.

People should no longer be forced to buy an annuity by the time they reach 75 and should be able to draw down their assets as they needed them, as long as £50,000 worth remained in the pot until they reach 75.

The report also suggests savers should be given a one-off opportunity to access up to 25% of their pension fund tax-free before they retire. Any money they did access would be deducted from the tax-free lump sum they could get on retirement.

Encouraging savers

In order to boost the number of people saving, the report says that couples should be able to contribute to each other’s pensions, enabling people to leave behind unused retirement savings, up to a possible limit of £100,000 without having to pay inheritance tax on them.

Workers could be automatically enrolled into an Isa, in a similar way as proposed for pensions. Under-16s would be encouraged to get in the savings habit at an early age, with a new Junior Isa. This would have a limit of £1,200 a year.

Further reading/Key links

Boost your savings rates: Top Savings, Cash Isas

More on pensions: Pensions guide, Free printed annuity guide