AXA has made a submission to HM Treasury in preparation for the forthcoming pre-Budget report (PBR).
Whilst we recognise the tough economic conditions that we are currently facing, not least the pressures on public finances, AXA also believes there are five steps the government could and should take that are revenue neutral in the long run, or are even cost saving, which could provide effective ways of increasing consumer confidence in the long term savings environment.
We need to be realistic in our outlook for the savings industry. The current climate presents many important challenges for the UK: fiscal rebalancing, retaining the UK's competitive position and encouraging a more prudent financial culture going forward. In our PBR submission, we recognise the tight constraints on public spending, but would observe that any upfront expenditure we do request is outweighed by direct long term cost savings.
Over the last two years there has been a considerable deterioration in the outlook for savers. The financial crisis has led to falling interest rates and, indeed, the Bank of England has acknowledged the base rate will remain low for some time - possibly years - to come. The combination of events has led to a situation where many savers are being inadvertently penalised for their prudence.
AXA would like more to be done to encourage a flexible approach to long term savings on the basis that there are significant challenges in persuading people to tie up capital for long periods of time if there is uncertainty around how it might be treated in future.
Amongst the recommendations AXA is making from a personal taxation perspective, we have called for:
The abolition of the ‘Age 75' annuitisation rule for retirees at which point they must secure a pension income. This would take the pressure off the annuity market at a time when annuities are not providing such good returns and would provide more of an incentive to long term funding if options for accessing income post age 75 are made more attractive. In particular we would like to see consideration given to how access to capital for long-term care provision could be tax advantaged, possibly by the release of tax free cash sums, as this would relieve considerable burdens on state provision and, in England and Wales, would prevent the forced sale of homes to meet care costs.
The provision of access to long term pension savings for certain life events. The terms of this would need to be strictly defined but it would mean that access is made available to a pension prior to it being paid as a benefit in certain circumstances. Such a change would be likely to increase the quantum of long term funding. We recognise that there are risks involved in this approach but also that many people currently avoid pension saving because of the access issue. A full review of this concept is required.
Create a consistent approach to savings policy that favours certainty for investors. Recent and repeated changes to the taxation environment for pensions and savings products have created an unstable environment for both savers and investors. This in turn leads to a mistrust of government amongst savers and a lack of confidence that current tax incentives have longevity. AXA favours the formation of consistent and equitable policies which encourage stability and trust amongst long term savers and investors over repeated changes to tax reliefs.
For this reason we think there is a need to:
Return to a level playing field between taxation of income and gains across different forms of investment vehicles. This would undo the inherent imbalance for investors between taxation of income and gains created by the last set of capital gains tax changes. Since these changes were made, we have witnessed a growing and almost unsustainable divide across various product classes caused by the new tax treatments. This results in unnecessary complexity and cost in the advice environment.
There is reason to be concerned about what the next PBR may hold. Populist measures aimed at taxing higher net worth clients have already been seen in the anti-forestalling measures announced last year. Higher rate tax relief remains a possible target and the prospect of personal accounts being introduced in 2012 raises another question. Will tax reliefs still have the same role when all employees have to be offered a pension scheme by their employer? Headline grabbing measures aimed at higher earners are always a risk but in the run up to a general election as crucial as this one, we probably ought to get the tin hats out.
Steve Folkard is head of pensions and savings policy at AXA Life
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