LITRG urge more imaginative pensions solutions for the low-paid
LITRG broadly welcome the Government proposals to simplify the taxation of pensions as 'support for tomorrow's pensioners', but question whether they will encourage the low paid to save for their retirement through pensions. Rather, we believe that a combination of incentives from the tax/benefits system and the security of National Savings could produce an imaginative, albeit partial, answer.
The Green Paper 'Simplifying the Taxation of Pensions', published in December 2002 by the Treasury and Inland Revenue, suggests that the reluctance of people on low incomes to save is partly attributable to the complexity of the current tax rules.
In our response to the Green Paper submitted today, LITRG argue that stronger forces are also at work. Annuity rates are lower than they have been in decades; trust in independent advice has suffered a blow following the mis-selling scandals of the late 1980s and early 1990s; the difficulties of the Equitable and other providers have caused a fundamental loss of confidence; the well publicised crash of stock markets has caused uncertainty, with employers casting adrift the final salary concept.
The observations in LITRG's response to the Green Paper are drawn from their experience in running free tax-advice clinics to low-income pensioners under TaxHelp for Older People (TOP) schemes in Wolverhampton and the rural areas of South West England.
Should the low-paid save at all in pensions?
At the lower end of the income scale, potential savers' incomes are too low both to cater for their consumption needs and to save. And with the current levels of state benefits and tax allowances designed to combat pensioner poverty, we question whether any conscientious financial adviser could now recommend investing in a pension plan.
Low annuity rates
Experience of volunteer tax advisers at TOP advice sessions bears out the Green Paper's observations that annuity levels are often very small, giving the recipient an income of between £6,000 and £12,000 a year including the state pension, if that.
At this level of income, debates in the Green Paper about annual and lifetime limits, chargeable surpluses, monitoring excess contributions, income drawdown and the like, belong to the realms of 'I wish'.
Taxing the state retirement pension
The way in which pensions income is taxed across the board is grossly inconsistent. LITRG argue that the social security pension income should be taxed when it is received, in line with personal pensions, rather than when it accrues. We have seen the present basis of taxation resulting in unfairness if the pensioner is taxed on their pension before they receive it. But this useful reform is still being filed away under the 'too difficult' category.
It seems wrong in principle that welfare benefits aimed at the poorest should face the possibility of being taxed before receipt when the payer is the Government. And yet the Inland Revenue itself has difficulty in explaining the correct legal basis to pensioners.
LITRG do not accept that an administrative inconvenience should remain on the statute book simply because it would be operationally too difficult to remove it.
This information has been provided for you by the LITRG. Please address any queries to Robin Williamson on tel 0844 579 6700; fax 0844 579 6701.