Pensions should be abolished and replaced with a universal savings wrapper called a Self-Administered Investment Trust (Saint), claims a policy paper published by the Centre for Policy Studies.
Saints can get Britain saving again, a policy paper by Charles Elphicke, head of tax and employee benefits at the law firm Reed Smith, claims the best way to solve the pensions issue is to offer a savings scheme that won’t lock money away for decades, and will leave savers in control of how their money is invested and, if they want to, when to spend it.
The paper claims a Saint addresses the problems people have with current pensions savings, including a distrust of the government and pension companies, and worries about locking away their money for 30 to 40 years. But Elphicke does say the idea will only work if the retirement age is increased to 70, then with a £40 increase in the basic State pension for a single person this will cater for those who still do not save. In his view any savings people make are an added bonus, and this combination means the need for dedicated pension saving falls away.
Looking at the proposals by the Conservative party for a Savings and Retirement Account (SaRA), and its previous idea for a Lifetime Individual Savings Account (Lisa), Elphicke says they are a step in the right direction, in the way they look at the poverty agenda, but argues they they need to be bolder.
SaRA, which has made it to the committee stage in the House of Commons, is loosely based on an Individual Savings Account (Isa), where people can build up their savings tax-free, but have the added flexibility to withdraw money under certain circumstances. The Saint idea is based on the concept of a Personal Equity Plan (Pep), so that savers can have as much control over their savings as they wish, with the option to invest in shares, property or art.
Although both systems claim to be simple, flexible and aimed at encouraging people to save, a Saint does not offer a tax-free incentive like a pension. Savers would not get tax relief when they enter the scheme, instead they would not be taxed when they withdraw their money, or on any returns from their savings.
All funds invested in a Saint that have been left there for three or more years would be free of tax if and when they were withdrawn. But any gains of a capital nature made outside the Saint would be taxable as if it was income.
Elphicke also argues a Saint would put long and medium-term savings on an equal footing, with all returns free of tax. He goes even further and suggests a Saint could be made an all-inclusive savings wrapper, which would negate the need for unit trusts, Peps, Isas, pensions and many other savings products, to leave just one savings vehicle.
But not everyone agrees with this new idea for pensions savings. John Lawson, head of pensions policy at Standard Life, says the idea has not been well thought out and expects to see more of these extreme solutions come out in the run-up to the Turner report. He also adds that the Saint suffers from the same flaw as the SaRA, in that if people can take money out of the account, they will do so and could end up blowing their retirement fund in one fell swoop.
Lawson says: “Very few people can exert the self-control needed to save for retirement in this way. But for those who do want to access their money we already have Isas which allow people to do this, and if they want to they can cash in an Isa and put some of the money they’ve saved into a pension. The only difference between an Isa and a Saint is that a Saint is self-invested so you can go beyond shares and into property and art, but after A-day that’s what a Sipp will allow you to do. The idea is all very well for sophisticated customers but people need something they understand, this is definitely not the way forward.”
Alasdair Buchanan, group head of communications for Scottish Life, agrees with Lawson about the complex nature of investment trusts and that the idea is riddled with issues that haven’t been properly addressed, although he adds there is an element of truth about people being unhappy at locking away money for years. But he also argues if people don’t do it they won’t have anything to live on in retirement.
He says: ”The Saint has quite a few similarities with the Conservative proposals of a SaRA and a Lisa, but it has a different approach to taxation, where the money is taxed going in but not coming out. It’s an interesting approach, but it would be very difficult to introduce it into the system we already have which has the reverse approach. The paper also doesn’t address the problems of people who already have private or occupational pensions, what will happen to them? Will they be allowed to continue as they are or would they have to convert to the new system? On a practical level the idea is very problematic, and the reasons for doing it don’t stand up particularly well to scrutiny. The whole thing just doesn’t hang together very well at all.”
In defence of his scheme Charles Elphicke, agrees the idea of a Saint, which he has invented, is a radical idea but argues the problems of pensions and savings are so deep-set they need a radical solution. He adds the idea is probably going to take some time to catch on and would be particularly unpopular among life companies and actuaries.
He says: “I wanted to start a debate that addresses the problems people have with savings and a Saint is simple, flexible and transparent. Isas have no flexibility and are laden with bureaucracy. We should be trusting people to make their own investment decisions, and offering them the flexibility to achieve this. At the moment we need nothing short of a revolution in savings and the pensions industry should see this as an opportunity.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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