Go with the flow

Merging pensions and Isas sounds great but axing higher rate relief would be a mistake, says Tony Philbin, managing director of corporate wealth, Legal & General

The suggestion that we should merge Isas and pensions into one simplified tax regime has started to do the rounds again. This idea, or at least similar ideas, come round so often they could be linked to changes in pensions minister, of which there were twelve during the Labour administration from 1997 alone. Each time the idea has been shelved, and for very good reasons. However, the real win would be to move more freely between tax wrappers to optimise long-term saving.

The latest suggestion to merge pensions and Isas seems to have started in June when David Willetts, who was shadow secretary for innovation back then, was reported in the FT “proposing a long-term investment savings account, integrating elements of Isas and pensions by allowing early access to savings for certain life events.”

It now seems to have picked up steam with the publication of a paper from the Centre of Policy Studies (CPS) proposing “the ultimate merger of Isas and pensions into a common tax framework.”

In determining the best course of action one must always start with defining the desired outcome, which is a mixture of a long-term need, to increase savings, reducing state dependency, and a short-term one, saving money (in the form of the reliefs available).

The CPS paper contains many views that I subscribe to, namely the need for simplification, the avoidance of the dreaded p(ension) word and the attractiveness of access to long-term savings. But nevertheless it has a high probability of an unintended consequence – a fall in the long-termsaving ratio.

By removing, or significantly reducing, higher rate tax relief the key stakeholders in the main generators of long-term savings, the decision-makers in companies that promote and sponsor retirement savings schemes, will not be as supportive of retirement plans in the workplace. The main danger of Nest and auto-enrolment is that companies with higher contribution rates will level down to the auto-enrolment limit, a danger which is compounded if those decision-makers see no value in the workplace savings plan from their own perspective.

A further danger of integrating pensions and Isas is that people see the need to save for the short-term as more important than saving for income in retirement. So they need saving products designed to closely serve those needs, not a one-size-fits-all solution.

Our regular ’MoneyMood’ survey confirms this. The results of our latest research show short term needs topping the list of reasons why peope save. Our latest research shows savings for a rainy day top of the list, on 68 per cent, followed by saving for a holiday, on 52 per cent. Saving to pay a household bill comes in at 50 per cent, while saving for home improvements polled 45 per cent.

It is only a matter of time before millions of people are saving in a company Isa at work

Isas can serve these needs, of course, because your money is accessible. They are designed to be “raided” whenever the need arises.
Whilst having access to part of your pension pot opens up benefit crystallisation based upon pre-set criteria does help in this equation, it is unlikely that those criteria will reflect the needs in the survey above. Furthermore, when looking at the second objective of reducing cost, removal of higher rate tax relief, as we have seen above, is a very blunt instrument. Surely government is better looking at the £2bn cost of building a state-founded alternative to the private sector.

The private sector has to demonstrate it is able to meet the universal inclusion requirements of Nest, and they have set out the prerequisites for doing so to government.

A better solution, as Michael Johnson, author of the CPS paper states, is to “introduce what I describe as fluidity of assets between the pension and Isa worlds”.

This is already happening in the corporate world. Modern workplace saving platforms allow easier movement between the wrappers, plus the convenience of enrolment and salary deduction in the workplace.

Another important factor is the fact that Isas are already here – 17 million of us have one. This is not a proposal or think tank suggestion. What’s more, the first payroll deduction workplace Isa was launched in July, which means such saving can and will happen now in the workplace as well as on an individual basis.

It is only a matter of time, in my view, before millions of people are saving in a company Isa at work, which will re-energise savings in this country far more quickly than any common tax framework, and not risk a wholesale levelling down of employer funded arrangements with the consequent reduction in the total amount saved.