Consumers could be helped to save and invest for their future, if the government simplifies the rules for ISAs and pensions and targets its top-ups more effectively.
- Abolish pension tax relief and replace with a simple system of age-based top ups
- Innovative government bonus of "100 minus age"
- Abolish complex and punitive rules restricting pension savings of higher earners
- Consolidate multiple ISA regimes into one "super-ISA"
- Cut pension Annual Allowance to £20,000 a year
- Combined ISA and Pension savings allowance of £80,000 a year for couples
- Early pension access and ‘help to buy’ style ISA bonus for first time buyers
Hargreaves Lansdown, the UK’s most popular platform for consumers to invest directly in ISAs and pensions, has written to the Treasury ahead of the Autumn Statement, recommending reforms to the pension and ISA rules.
Tom McPhail, Head of retirement policy:
"Policy initiatives such as auto-enrolment and the new Lifetime ISA are helping individuals to save and invest for their future, however there is still a lot more that can be done. Those who invest well and build even a half-decent sized pension pot are penalised by the lifetime allowance; higher earners are penalised by the annual allowance taper; meanwhile younger, lower earning workers tend to do worst out of the tax relief system.
With the impending launch of the Lifetime ISA, investors will have around half a dozen different tax privileged savings products, all with their own unique terms and thresholds, competing for attention. The LISA is a good product for the right investors but there is now a real risk that more products will mean less overall savings.
Investors want a simple savings system which helps and rewards those who want to do the right thing. There are generous incentives available from the government but the rules are riddled with complexity and inconsistencies. Our proposals would mean a fairer system with more efficiently targeted incentives, which would help to engage younger workers with retirement saving."
The bulk of pension tax relief goes to employers, so reforming the tax relief for employees can deliver significant behavioural changes without having a detrimental impact on Treasury expenditure on pensions. Rolling the Lifetime ISA into one ‘super ISA’ would also save money for the Exchequer.
Hargreaves Lansdown’s key policy proposals include:
- Separate pension contributions and the government incentive from the tax system, giving everyone the same £20,000 a year Annual Allowance, irrespective of earnings.
- Replace pension tax relief with a government top up of 100 minus an individual’s age.
- Abolish restrictive complexities such as the Lifetime Allowance for defined contribution pensions and the Tapered Annual Allowance.
- Consolidate overlapping ISA regimes into one simple ISA.
- Retain Help to Buy style government top up for under 40s when buying first home.
- Allow limited early access to pensions for first time house purchase.
- Put employees in control of choice of their workplace pension.
It is important that the overall package of measures does not cost the Treasury money. Hargreaves Lansdown has identified a number of ways to save the Government money through these reforms:
- Reducing the Annual Allowance to £20,000
- Abolishing the up-front LISA top up
- Adjusting the Lifetime Allowance calculation for final salary schemes from 20:1 to 30:1
- Abolish new salary sacrifice on pensions
The current system of pension taxation is riddled with inconsistencies and inefficiencies. By breaking the link with earnings, it will be possible for lower earners to have the same pension contribution opportunities as higher earners. It will also move away from a system which gives the most generous government top ups to the highest earners.
We propose that government top-ups should be directed to where they would be most effective. By weighting the top ups in favour of younger workers the government would:
- Motivate younger people to engage with retirement saving
- Provide direct top-ups to those who cannot afford to make such large savings themselves
- Correct some of the intergenerational imbalances that have developed in society
- Make the most of long term compound investment growth
This would be achieved by a government top up of 100 minus an individual’s age: a 25 year old would receive a top up of £75 for every £100 they invest; a 50 year old would receive a top up of £50 for every £100 they invest.
The abolition of the Lifetime Allowance for Defined Contribution investors would remove the current penalty which is applied to prudent and successful savers. The abolition of the Tapered Annual Allowance would simplify the pension system and reduce administration costs.
Consolidated ISA regimes
|ISA Type||Contribution limit||Special features|
|Junior ISA||£4,080||Must be aged under 18. Between ages of 16 and 18 can have both a junior ISA and an adult ISA|
|Cash ISA||£20,000||Can only hold cash|
|Stocks and shares ISA||£20,000||Can hold stocks and shares and cash|
|Innovative Finance ISA||£20,000||Can only hold cash and IF investments|
|Help to Buy ISA||£200 per month + up to £1200 up front||Can only hold cash. Receives a bonus top up from the government when used to buy first home. Can't invest in both a Help to Buy and a LISA in the same tax year.|
|Lifetime ISA||£4,000||Receives a top up of 25% from government, which is kept provided funds are used for first house purchase or withdrawn after age 60|
Proposed new ‘Super ISA’
|ISA Type||Contribution limit||Special features|
|ISA + Junior ISA for under 18s||£20,000 or £5,000 if aged under 18||First time buyers can draw up to £16,000 and claim up to £4,000 government top up|
- A help to buy style top up of up to £4,000 when using up to £16,000 from an ISA to buy their first home
- Early access to pensions, allowing first time buyers to take up to 50% of their pension pot, up to a maximum of £15,000 when used to buy a house.
Workplace pension control
At present, employees have to accept the auto-enrolment scheme selected for them by their employer. We propose that for those that want to exercise choice, it should be possible for them to request their employer pays pension contributions into the pension of the employee’s choice. This will avoid disrupting the employee’s savings journey every time they change jobs.
The Autumn statement will be the first landmark policy event of the new post-Brexit Tory government; Hargreaves Lansdown is calling on policymakers not to forget the needs of ordinary savers.
For more information, interviews or a copy of Hargreaves Lansdown’s full policy proposals, please get in touch.
NOTES TO EDITORS
Globelynx and ISDN ready
Hargreaves Lansdown is equipped with a live in-house broadcast camera via the Globelynx network and has an ISDN line available for radio interviews - 0117 934 9006. To arrange an interview with a Hargreaves Lansdown spokesperson please contact the person you wish to speak to directly using the contact details above, or call Globelynx on 0207 963 7060 or email firstname.lastname@example.org.