The savings system requires major reforms if people are to be encouraged to save more, a leading think-tank has argued.
The Centre for Policy Studies (CPS) has produced a paper supporting a simplification of the process for retirement saving.
Among its recommendations, the two-track pension/ISA tax relief regime would be dropped and replaced with a single, unified tax framework, one that is easier to understand and attractive to long-term savers.
Under the plan’s more detailed suggestions, there would be an annual contributions limit of £45,000 a year for all tax-incentivised savings (with a maximum of £35,000 for pensions).
Tax relief should be at the saver’s marginal tax rate, offering those earning more than £150,000 a year the prospect of at least some 50 per cent relief.
Other proposals include bringing ISA and pension savings regimes closer together through a combination of some pre-retirement access to pension savings and, at retirement, retrospective tax relief on ISA assets that are re-nominated as pension savings.
Partners should be able to fund each other’s pension pots and receive tax relief, irrespective of their own earnings.
Unused savings should be available to be passed onto heirs free of inheritance tax, the CPS said.
In addition, annuities purchased with ISA-derived funds should be exempt from income tax, in line with the tax-exempt status of withdrawals from ISAs.
The requirement that savers must buy an annuity at 75 should be scrapped and replaced with a regulation that allows people access to their pension savings when they are needed. The only stipulation being that savers must have a minimum of £50,000 of assets in their pension pot when they reach the age of 75.
The report also recommended the introduction of a new mini-ISA with a yearly limit of £1,200 to promote saving among the under-16s.
