Centre for Policy Studies: eight proposals to reform retirement saving

Influential economist Michael Johnson has outlined eight proposals to reform retirement saving, including inheritance tax (IHT) free pension fund bequests and a single contribution limit for pensions and ISAs.

In a paper for the Centre for Policy Studies, entitled Simplification is the Key, Johnson argues for early access to pension funds and aligning pensions and savings taxation more closely.

He recommends IHT-free pension fund bequests up to £100,000, auto-enrolment into ISAs, removing tax on annuity income and a single savings contribution limit for pensions and ISAs.

‘Currently people have two questions: am I going to save and, if I am going to save, do I want to access it or take the tax bribe? Either way people could end up feeling they made the wrong decision,’ said Johnson. ‘What I am proposing is taking away that second question.’

The paper suggests early access to 25% of assets in a pension wrapper and the option of re-nominating ISAs as pension savings.

‘What we are trying to do is move ISAs and pensions closer together under a single tax regime. For example, there would be a limit of £45,000 shared between pensions, £35,000 annually, and ISAs’ £10,000 annual limit,’ said Johnson.

The paper also calls for exemption from income tax for annuities bought with ISA funds. This would then be combined with an extension of workplace pension auto-enrolment to ISAs.

‘The point is that ISAs are very popular and they attracted £37 billion of subscriptions last year while workers put £24 billion into pension savings,’ said Johnson.

‘If people are willing to save at all then why not go the next step and include ISAs in auto enrolment?

‘It would increase ISA assets and it is in the government’s interest to encourage people to buy annuities. Just don’t tax [annuity income]. People buy an annuity to ensure they have income, let’s not penalise that unfairly.’