www.cps.org.uk

What future pensions?

2 December 2014

Michael Johnson Research Fellow, Centre for Policy Studies

2

Central projection for PSND to GDP (%)

* OBR’s Fiscal Sustainability Report July 2013 ** OBR’s Fiscal Sustainability Report July 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060

99% in 2062 - 63

66% low

(mid 2030’s)

Ratio excluding

impact of ageing

population (approx.)

53% low

84% in 2063 - 64

2013 2014

PSND: April – Oct £60.5 £65.7 +£5.2 billion

Savings (2012) and demographics

Population aged 65+

UK Japan

1950 10.7% 4.9%

2010 16.5% 22.6%

2050 22.9% 37.8%

OECD; National Accounts at a glance 2014. Definition for HNSR: the ratio of household saving (plus

the change in net equity of households in pension funds) to household disposable income.

Household net Net debt

saving rate as % GDP

Greece -14.6% 102%

Japan 0.8% 140%

United Kingdom 2.4% 69%

Italy 3.6% 113%

Netherlands 4.1% 42%

Spain 4.4% 60%

Canada 5.0% 59%

Ireland 5.2% 83%

United States 5.8% 100%

Norway 8.2% -167%

Germany 10.3% 50%

Australia 10.4% 27%

France 11.7% 70%

Sweden 12.2% -24%

4

Costs of an ageing population

+ Stagnant productivity growth

+ Negative real earnings growth

+ Rising interest rates (2015+ ?)

= Fiscal squeeze

+ Approaching saving tipping point

= Diminishing supply of domestic capital

Cost of capital to rise

We need a savings culture

The squeeze is on

Impact on

personal debt?

Tax relief, 2012-13, £ billion

£270 billion of cash since 2001-02

HMRC; Table PEN 6: Cost of Registered Pension Scheme Tax Relief, February 2014

Up-front tax relief on employer contributions £21.3

Up-front tax relief on employee contributions £6.7

Tax-exempt 25% lump sum at retirement (approx.) £4.0

NICs relief £15.2

Untaxed pension products' income £6.9

Total £54.1

less pensioner income tax £11.5

= net cost to HMT £42.6

6

Not deferred tax:

Many 40%’ers only pay 15% i/c tax…........decades later

Tax relief: inequitable distribution

Income tax is progressive..

…..so tax relief is regressive

Income

decile

% of total

tax relief

Corresponding

annual income*

Bottom 1%

2 1%

3 1% < £23k

4 2%

5 3%

6 4%

7 6% £23k

8 8% to £45k

9 17%

Top 58% > £45k

Top 1% 30% > £100k

Top 0.5% 22% > £150k

* approx

HMRC; Personal Incomes Statistics 2011-12, January 2014

7

Savers’ behaviour

Denmark: DKr1 spend……

…….for DKr0.01 rise in total h/hold saving*

UK?............The Great Trade……..EET to TEE

Active savers (15%) Passive savers (85%)

Behavioural

driver

Save anyway: alert to

seizing tax incentives

Automatic (default) policies

harnessing inertia: AE

Impact on total

h/hold saving

Minimal increase:

savings reallocated

Significant increase

HMT cost Huge per capita Small

* Active vs. passive decisions and crowd-out in retirement savings accounts: evidence from Denmark; Chetty, Friedman, Harvard

University, Leth-Petersen, Nielsen, University of Copenhagen, Tore Olsen, Centre for Applied Micro-econometrics, Dec. 2013.

8

Tax relief: policy options

• Recent

• AA: £255k…….£50k…...£40k….?

• LTA: £1.8m….£1.5m ….£1.25m…..?

• 25% tax-free lump sum?

Savings

2012-13 £2.3 bn

2013-14 £4.4 bn

Post-tax £ tax relief

Flat rate contribution from HMT Pot total Communication

33.3% £100 £50.0 £150.0 £2 for £1 “free”

30% £100 £42.9 £142.9 £7 for £3 “free”

25% £100 £33.3 £133.3 £3 for £1 “free”

20% £100 £25.0 £125.0 £4 for £1 “free”

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• Scrap all tax relief 50p per £1 subscribed

• Independent of taxpaying status

• Max. £4,000 from HMT: focused on first £8,000 savings

• Simple…… and highly redistributive

• £30,000 annual contributions limit

Tax relief: proposals to boost effectiveness*

* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, April 2014

10

Tax relief: proposals to boost effectiveness*

* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, April 2014

• 3 quid pro quos:

But……..Generation Y……..

1. Scrap LTA

2. Re-intro 10p rebate on dividends

3. £100k IHT exemption on transfers to pension pots

Generation Y’s perspective: ISAs?

Lifetime (ISA) savings agenda to emerge ?

Personal

pensions

Stocks &

shares ISA

ISA market

value

2007-08 £10.2 £10.4 £146

2008-09 £9.0 £9.7 £116

2009-10 £7.8 £12.5 £174

2010-11 £7.7 £15.5 £183

2011-12 £8.7 £15.6 £189

2012-13 £7.7 £16.5 £222

“Pension” does not resonate

Subscriptions:

(+ £220 Cash ISA)

11

12

• 4 ISAs + CTF = Lifetime ISA

• Cradle (+£500) to grave

• HMT incentive……shared with pension products

• Withdrawal rules: some ready access….to capital, only

• Tax treatment: pre-60 / post-60

• Nudges to promote default-based saving

• Default fund / income accumulation / AE

Time for the Lifetime ISA*

* Introducing the Lifetime ISA, MJ, August 2014

Lifetime ISA vs. pension product

Lifetime ISA Pension products

HMT 50p incentive Yes Yes

Pre-60 access Yes, but first repay 50p

per £1 withdrawn

Pre-55: none

60+ access Yes, taxed at marginal rate 55+: tax at marginal rate

Access to capital growth None until age 60, then Pre-55: none

& accumulated income taxed at marginal rate 55+: tax at marginal rate

Tax-free 25% lump sum No Yes

Charge cap on default fund 0.35% p.a. 0.75% p.a.

Interaction with m-t benefits Treated as capital Exempt

Part of estate for IHT ? Yes No

14

• Capital crisis coming

• Tax relief: the lowest hanging, juiciest fruit in Whitehall?

• The Great Trade

• Lifetime ISA to formally bring ISAs into retirement arena

• Chameleon, with saver in control

• What future private pensions?

Conclusion

www.cps.org.uk

What future pensions?

2 December 2014

Michael Johnson Research Fellow, Centre for Policy Studies