Tax concernsPensions Commission warning on tax

04 April 2006

Taxes may have to rise if the pension system is to be reformed, the Pensions Commission said today.

In its final report the commission said the proposals for a more generous state pension would mean that pensions took a bigger cut of the UK's gross domestic product (GDP).

In November, the commission - appointed by the government to look at the future of pensions - proposed increasing the state pension in line with earnings rather than prices, and raising the recipient's age to as high as 69 by 2050 to help finance the change.

Significant implications for tax

The head of the commission, Lord Turner, said this would lead to the amount of GDP spent on pensions rising by 1.5 per cent between now and 2050. He added that this would have significant implications for either tax or National Insurance contribution rates, or for other categories of public expenditure.

In its November report, the commission proposed the introduction of a national pension savings scheme (NPSS) which would sit alongside the current state pension. All employees without decent existing provision would be automatically enrolled; their contributions would be 5 per cent and employer contributions would be 3 per cent. Employees would have the right to opt-out.

Alternatives to the NPSS have been suggested. Among them is a version proposed by the Association of British Insurers (ABI). But Which? estimates the charges could be more than four times higher than the Pensions Commission's scheme. This would leave the average earner thousands of pounds worse off over the course of their lifetime.

Lowest costs in long term

Lord Turner wouldn't comment in detail on alternative models, but said the commission continued to believe that its proposal was the best option, as it was likely to have the lowest costs over the long term, with annual charges of 0.3 per cent.

The government will respond to the commission's report in a White Paper which is due to be published this spring.

Which? Principal Policy Adviser Mick McAteer, said: 'This report paves the way for a White Paper to herald reform of the UK pension system. The Paper should implement the Commission's key recommendations - especially the need for an independent national pension savings scheme (NPSS) - which will make saving for the future affordable and restore confidence in pensions.

'An independent NPSS represents the fairest, most affordable and sustainable way of helping consumers to save for a decent retirement. Which? research shows that two in five people would have most trust in an independent body to manage their pensions. Without trust there cannot be sustainability.'