The UK’s household savings rate is at its lowest in over 50 years
According to pro-free-market think tank the Centre for Policy Studies, the time is ripe to restructure pensions tax relief in order to encourage Britons to save more.
According to the organisation, the UK’s household savings rate has nosedived to 4.9%, the lowest figure in 54 years, which made now the right time for changes to encourage savings. The Centre also said that reform was necessary because the top 1%of earners currently received twice the amount of pension relief than 50% of the working population.
It claims that the “widespread distrust of the pensions industry” combined with the “complexity, cost, and inflexibility” of the current pensions system discouraged ordinary taxpayers to save for their futures. Young individuals, particularly Generations X and Y, were becoming more and more disengaged, it added.
Centre contributor Michael Johnson has compiled a report on the matter. Johnson, who used to be in charge of David Cameron’s Economic Competitive Policy Group, has 21 years’ experience in investment banking. He launched his “Five Proposals to Simplify Savings” study a few days ago, hot on the heels of the British Government’s recently announced review of pensions tax relief.
The report contains five major suggestions to widen the UK’s savings base and at the same time reduce Treasury expenditure:
Get rid of the current pensions tax relief and put in place a system of bonuses on employer and individual retirement savings contributions, which should be totally unconnected to tax-paying status
Improve auto-enrolment by doing away with the current minimum earnings barrier
Discontinue NIC rebates and instead introduce bonuses on employer contributions, deposited directly into the workers’ personal bank accounts
Put in place a relatively high cap on the total bonus that people are allowed to receive in any specific year
Set up a Workplace ISA to accommodate employers’ contributions, which should not be accessible until the employee turns 60
According to Johnson, his proposals would specifically benefit lower-income earners who currently benefit least from tax-related savings incentives. He believes that the proposals would also benefit gender equality, address the “net pay” issue and “dramatically simplify the savings landscape for people in all income brackets”.
The Centre for Policy Studies’ Director Robert Colvile described the current pensions savings environment as “complex” and said that many individuals were discouraged from making adequate preparations for their retirement.
Colvile added that the suggestions contained in this report would save the Treasury around £10bn per year and boost mass savings. It was vital, he added, that the current system was reformed to give people access to financial products that suit both their present and future needs.
Johnson went on to say that the current tax relief system was “incomprehensible” to the ordinary public, and the tax relief cost the British Government billions of pounds every year – 68% of which flowed to additional rate and high-end taxpayers who didn’t need such major savings incentives.
He concluded: “The Government should focus its reforms on proposals which do the most towards creating a broader savings base – such as replacing tax relief with bonuses on pensions contributions.”
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