The UK’s major political parties will unveil manifestos designed to deliver a majority at the next general election in the coming weeks.
While these will inevitably focus on short-term issues to satisfy the five-year electoral cycle, a new Government will also have an opportunity to consider longer-term reforms.
To help inform that discussion, AJ Bell has today set out a series of proposals designed to radically simplify the rules savers are required to navigate.
- ISAs, which have become popular with investors partly because of their simplicity, are under threat from the same creeping complexity that has suffocated pensions
- We now have at least six different types of ISA, each with different rules and restrictions people need to understand
- The next Government should return the ISA to its simpler roots by creating One ISA incorporating the main features of the existing framework
- This would include a 25% bonus on the first £4,000 of savings where the money is used to pay towards a first home, payable on completion
- The next Government, whoever it may be, needs to address mounting complexity which risks putting an entire generation off saving for their future
- In the short-term the annual allowance taper needs to be scrapped to ease strains on the NHS
- This should trigger a longer-term, independent review of pension tax rules aimed at simplifying the system and encouraging more people to save for retirement
- The unfair and poorly understood money purchase annual allowance (MPAA) should also be ditched as part of this review. If necessary, the annual allowance could be lowered to compensate for any lost revenue to the Treasury
- In addition, policymakers should aim to simplify the overall tax structure by moving to a single annual allowance for defined contribution (DC) pensions and a lifetime allowance for defined benefit (DB) pensions
- Pension death benefits should be formally excluded from the Inheritance Tax net to remove the situation where pension providers, not the customer have discretion over who receives pension funds when someone dies
Andy Bell, chief executive of AJ Bell, comments:
“All too often election manifestos focus on short term political point scoring, while the savings gap in the UK continues to widen. This is one of the biggest challenges our society faces and the next Government will have a huge opportunity to make life a lot simpler for people trying to do the right thing and save for their future.
“Pension reforms in 2006 were supposed to usher a new era of simplification for pensions, but since then politicians have repeatedly tinkered with the rules to the point even an actuary would struggle to make sense of some of them.
“No sensible person would create a pension system from scratch with three different annual allowances, a lifetime allowance and no fewer than seven lifetime allowance ‘protections’.
“Now automatic enrolment has been fully introduced, focus needs to turn to engaging more people to save for their own futures. Creating a more straightforward tax system which people understand is a necessary condition for building greater levels of trust in pensions.
“ISAs have similarly morphed from simple beginnings to become increasingly difficult for investors to understand.
“Incorporating the best features of the current ISA system in One ISA, including the bonus for first home purchase, while removing the unnecessary complexity we know puts people off would make life easier for millions of people.
“Furthermore, new investors could be better encouraged to save for their future in a system they can more easily understand.”