“Bring in simplicity and get rid of silos” Ken Davy
Silos are all very well for separating different types of grain, but the silo mentality and the complexity with which succeeding governments have treated savings has been an expensive failure.
It has cost the exchequer billions in pensions tax relief, most of which has gone to the better off, who in most cases would have saved anyway.
Conversely, the less well off, particularly if they have not used a financial adviser, have rarely saved as much as they could have, with the result that millions of people are still reaching retirement with inadequate savings.
Indeed, recent figures from the government suggest 13m people face a significant drop in income when they retire, which is a national scandal.
The primary reason for this is the way different methods of savings, whether they be pensions, Isas or anything else, have been seen as distinct areas of government policy.
What is needed is an overall approach that delivers a balance of incentives and simplicity, with the clear objective of encouraging everyone to make the maximum self-provision they can for their later life needs.
To this end, the better off are already well-catered for by the Isa regime, from which tax-free income (and capital) can be taken at any time.
Incidentally, the money going into Isas has already been taxed, so the real cost to the exchequer of what will become enormous tax-free funds is going to be huge, a point which may eventually be of concern to a future chancellor.
The real issue is how to get the vast majority of people who are on lower incomes to save enough for their future.
This requires the simplification of pensions and a clear incentive to save, plus a degree of access to the money saved.
Simplification includes scrapping the lifetime allowance and the convoluted rules surrounding it.
In addition, all tax relief on pension contributions should be abolished and replaced by a government cash bonus paid directly into an individual’s savings plan.
Finally, relatives and friends should be able to add to an individual’s savings plan.
Getting rid of the silos and providing a real incentive for the average person to save, while ending the ridiculous amount of tax relief wasted on higher rate taxpayers, would create a fairer, simpler, less costly and more effective savings regime for everyone.
Ken Davy is chairman of the SimplyBiz Group