Is there no end to the permanent revolution that has engulfed Britain’s pension system?by Andy Davis / September 17, 2015 / Leave a comment
Around five years ago, I gave each of our children about the last thing anyone would put on their Christmas list: a self-invested personal pension. My rationale was simple: investment gains are a product of time and money, and the more of one you have the less of the other you’re likely to need. Children have an abundance of time and no money, so I reasoned that investing even fairly small sums over 60 years or more would make the most of the biggest advantage they enjoy: their youth.
At least, that’s how I rationalised it. Looking back, however, I have to admit the deciding factor was far less esoteric—it was the lure of free money.
For children, tax relief on pension contributions is an excellent deal. Up to £2,880 a year can go in for each child and attract tax relief at 20 per cent, lifting the total to £3,600. Since children pay no tax, it felt as though we were somehow beating the system. Or to put it another way, the incentive to save for a long-distant future that the tax relief was intended to provide had worked a treat in my case. If this incentive hadn’t been available, I doubt I would have set up their Sipps (self-invested personal pension), even though I fully understood the benefits they stood to gain by entering adulthood with the basis of their pension fund already in place.
This issue of incentives came to mind again with the public consultation, announced in George Osborne’s July Budget, on the future of pension tax relief. Much of the commentary that has accompanied this exercise (which closes at the end of September), has suggested that three main options are on the table: no change; a switch from tax relief at the individual’s highest marginal rate (20, 40 or 45 per cent) to a flat rate, perhaps 20 per cent; or the introduction of an Individual Savings Account-type system with a much smaller government top-up when money goes in but no tax to pay when it is finally taken out.