In my previous article I looked at the single positive commitment in the DWP paper "Reinvigorating Workplace Pensions" (aka 'defined ambition', or 'DA'). The rest of it read like a summary research paper of what might be done. Absent throughout was any recognition of the general rule that people will only do more than they have to do if there is an incentive.

The DWP does not do incentives. Or not any more: in the past, contracting-out rebates might have been considered as such, especially in the very early days of the protected rights route. But that's history. No, these days the Treasury rules supreme (some might say it always has): we must look to pensions tax legislation for incentives. Unfortunately, we find there a mind to row in the opposite direction to Steve Webb. Yet another cut to the annual allowance (AA) looms , and a lifetime allowance (LTA) reduction too.

Under the Chancellor's cosh to find £1bn from pensions by 2016/17 (almost as much as the amount given away by the 1% cut in corporation tax), the Treasury decided this month they needed to use both of what they regard as their "levers". To have realised this supposed gain from cutting the AA alone would have impacted too much on too many DB scheme members (such as civil servants and MPs), so fund growth is to be attacked as well by lowering the LTA. This constant tinkering makes it even harder to plan ahead.

Disincentivising seems to be the order of the day. Though it is often claimed that such cuts only affect a small minority of pension savers, equally often it's pointed out that these include the people who decide about workplace pension provision for their employees. How does this help to reinvigorate?

The extra administration cost associated with such tinkering is typically underestimated by government. The additional burdens this time are costed at £80m in one-off costs and then a mere £10m pa. Almost certainly this won't cover the 'hassle factor'.

So far so dispiriting. Maybe it is time for a radical re-think. Why should we be constrained at both ends? Instead, give each pension saver a once-only choice to be limited by either the AA or the LTA. In this way all regular savers are incentivised by the removal of the ceiling at retirement. The 'chunky' saver (e.g. a self-employed business owner) is allowed to pay in a large one-off amount without an AA charge, but restricted by the LTA.

Here's another idea to incentivise saving: a 'Working ISA' for which there is no cap on annual contributions from taxed income; the proceeds to be tax-free on the first £500,000 (in today's terms), with any excess taxable at marginal rate; the restriction being that you couldn't access it before State Pension Age.

Just a couple of personal suggestions. Saving is important, but we need an incentive.


Ian Neale, director, Aries Pension & Insurance Systems Ltd