Budget failed to reflect flexible savings idea

New pensions minister Steve Webb (pictured) has backed early access to pension funds, so it was a surprise that savings flexibility was not mentioned in the emergency Budget.

The Budget appeared to include a recommendation from a paper released recently by the Centre of Policy Studies that there should be a £45,000 annual pension contribution limit. The paper also linked pension tax reform to the taxation of ISAs, so it is perhaps surprising the Budget said little about savings reform.

ISA-pension hybrid

Economist Michael Johnson wrote the paper, Simplification is the Key, and set out proposals to introduce flexibility into the pensions system via an ISA-pension hybrid.

‘There should be a combined ISA and pension savings contributions limit for tax-advantaged savings of £45,000 per year, with a maximum annual contribution to pension savings of £35,000,’ he says.

‘This limit, combined with tax relief on pension saving contributions being provided at the saver’s marginal rate, would not increase the cost of pension savings tax relief.’

He adds: ‘Had pension savings products been taxed as per the ISA world, the Treasury would have saved roughly £12 billion in tax relief costs in 2008-09.’

Tax harmonisation

John Jory, director general of the Centre for Retirement Reform, said harmonising the taxation of the two products could open the way for more far-reaching innovation.

‘ISAs are popular because people can get hold of their money at a time of need. I think there is an argument to say employers could give some contribution to an ISA, or some form of workplace ISA,’ he said.