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'Scrap pensions tax relief and embrace Isas': The solution to the savings gap is simple, argues DAVID HARRISON

Published: 07:51 EST, 21 October 2015 | Updated: 07:51 EST, 21 October 2015

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The Treasury needs to get real: Make saving simple

After more than 30 years in financial services, the words ‘pensions review’ have become depressingly familiar.

The savings crisis in the UK should concern us all and I am afraid the latest review by the Treasury, although well intentioned, is not likely to fix pensions, nor close the savings gap.

The industry obsesses about pensions but the public moved on a long time ago. Too many with vested interests have yet to catch up.

No wonder the public is confused. We are urged to be responsible and to save, while lifetime and annual allowances penalise those who heed the advice and do the right thing.

Pensions cannot be the solution to the savings gap because they are part of the problem. That is not to be defeatist; it is to listen to savers and to understand what they are really saying.

We read a lot about the savings crisis, but how big is it in reality? True Potential has studied the UK’s consumer savings habits, involving more than 14,000 people.

Savers tell us, on average, their goal is an annual income of £23,000 in retirement.

Based on current savings, an income of £6,000 per year is more realistic.

That gap between aspiration and reality needs radical, bold action, not more tinkering at the edges.

The overwhelming majority of the outspoken voices in this most recent pension debate argue for the status quo. They crystal-ball gaze about the risks of changing a system that is so obviously broken but they forget that we already have a crisis.

Many proposals for reform have been put forward.

Should we keep tax relief on pensions?

How about allowing people to take a pension income tax-free?

Or introduce a new rate of tax relief altogether?

Time to scrap pensions tax relief

The solution we put forward in our response to the Treasury’s review, is a simple one – scrap tax relief altogether.

Tax relief costs the country more than we spend on business, defence, transport or environment

David Harrison at True Potential

Tax relief is what complicates pensions and is no longer the incentive it once was. Instead of encouraging millions of people to invest into pensions, tax relief costs the country more than we spend on business, defence, transport or environment.

But worse, it restricts thinking about the best way to save for retirement because it limits the debate to one product – a pension.

Access to one’s own money is a far greater incentive and is at one with the government’s excellent pensions freedoms, which we fully support. No wonder savers have voted with their feet and have chosen to put their money into an Isa.

To those who argue that tax relief is an enormous incentive, I simply say, look at the evidence.

HMRC’s own figures show that almost £79 billion was placed into adult Isas in 2014/15. That is an increase of more than £20 billion compared to the previous year.

Individual pension contributions have been declining – down by a quarter in 2013/14 compared to 2007/08. This trend would almost certainly continue were it not for employees being automatically enrolled into a pension.

Our own data supports this. Since we launched impulseSave® in 2014 – the technology that enables savers to top-up their investments from £1 on mobile devices – 67 per cent of new money has been saved into Isas compared to 6 per cent in pensions.

Of course some will warn, paradoxically, that people will fritter their life savings away if they have access to their own money. We simply need to look at other countries such as Canada, with similar registered savings plans, to know this isn’t the case.

Instead of locking money away from those who have earned it, let’s help people to have a clearer understanding of their retirement goals and the funds needed to support them.

Instead of complicating financial services beyond the understanding of most ordinary people, let’s simplify it so that savers are empowered to make rational decisions.

I urge ministers to think radically and be bold. Without doubt, tax relief is what complicates pensions so the simple solution is to do away with it altogether and allow people to transfer their pension funds into an Isa.

Instead of yet more pension reforms – the very thing that has discredited them as a product, it is time the industry and policy makers caught up with the public. Isas are simple and popular, let’s keep them that way.

David Harrison is managing partner at True Potential LLP