State pension should rise in line with earnings, while “fundamental reform” of pensions tax relief is needed, according to an influential cross-party parliamentary committee of MPs.
The Treasury Committee has recommended replacing the “unsustainable” triple lock – which sees the state pension rise annually based on the highest of earnings, inflation or 2.5% – with an “earnings-uprating”.
It also doesn’t believe tax relief is an effective incentive for vulnerable households, and says the government should consider “fundamental reform” to introducing a flat rate of tax relief. The Committee adds that bonus and matching incentives – such as those used on Help to Buy Isas and the Help to Save scheme – have more of an impact.
In addition, the committee recommends replacing the lifetime allowance – the £1.03 million limit you can save into a pension in your lifetime – with a lower annual allowance.
The proposals form part of the Treasury Committee’s wide-ranging report into UK household finances, which it launched in November 2017.
Nicky Morgan MP and chair of the Treasury Committee explains: “Many households are facing challenges that are putting pressure on the health and sustainability of their finances. Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.
“The committee’s report makes a series of recommendations for the government to consider that would help households ensure that their finances are as resilient as possible,
“Whilst financial service regulators and guidance bodies have important roles to play, the government should not pass the buck to them.”
A Treasury spokesperson comments: “As we’ve said before, we’re committed to maintaining the triple lock on the state pension to the end of this Parliament.”
Other key recommendations made by the report
Other key findings and recommendations that the Treasury Committee has made include:
- High cost credit: The financial watchdog, the Financial Conduct Authority’s (FCA), proposals on overdraft fees, rent-to-own, home-collected credit, and catalogue credit and store cards and further recommendations therein should be enacted as quickly as possible.
- Lifetime Isas: The committee recommends the government abolish the Lifetime Isa (Lisa). It criticises the product as complex and inconsistent in regards to other parts of the ‘savings landscape’.
- Payday loans: The 100% cost cap on payday lending, introduced in 2015, has been a success and proven beneficial for customers.
- Debt collection: Debt collection practices from public authorities are described as the “worst in class”, pursued overzealously, uncompromisingly and often resorting to bailiffs. The committee calls for the public sector to improve its debt collection standards.
- Responsibility to the public: The committee says the Treasury should be ultimately responsible for ensuring that low rates of saving or high levels of indebtedness “do not imperil long-term economic stability or living standards”. The committee adds that it should not be the responsibility of financial regulators such as the FCA.
- Self-employed workers: The committee believes the government lacks a clear strategy to tackle growing concerns over the lack of provision and resources for self-employed workers.
Of the Lifetime Isa, a Treasury spokesperson comments: “People deserve choice and freedom in how they save, and the Lifetime Isa does just that. It is an effective way to help people get on the housing ladder or save towards their retirement.
“For every £100 saved, we give a generous £25 bonus, and so far, around £130 million worth of bonuses have been paid to 170,000 investors.”
‘The committee deserves great credit for pinning down the government’
Responding to the report, Tom McPhail, head of policy at financial provider Hargreaves Lansdown says: “The committee deserves great credit for pinning the government down on its responsibility for long-term household savings, investment and financial resilience. The proposal this should form part of the annual Budget reporting process to strengthen this accountability is an excellent one; it would do the government no credit if it now ducks this challenge.
“We also welcome proposals to simplify the savings system and in particular pensions tax reliefs and limits. The Committee’s proposals for abolition of the Lifetime Allowance limit, offset by a lower annual allowance and a flat rate of government tax relief top up would enjoy widespread support.
“The Committee’s proposal to abolish the Lifetime Isa addresses the concern in many quarters the savings landscape has become over-complicated and difficult to navigate. However the Lisa is proving popular with those who are eligible so we’d want to see a proper consultation process before the government took any steps in this direction. A root and branch review and simplification of retail savings and tax incentives would be welcome but is almost certainly beyond the capabilities of this government, certainly until Brexit is resolved.”
Phil Andrew, chief executive of StepChange Debt Charity, who gave oral evidence to the committee as part of its enquiry, adds: “The committee’s report shows a clear understanding of the debt landscape, a keen awareness of where problems lie, and a robust identification of who has the power to solve them.
“In many cases, it is the government which needs to take action. We agree wholeheartedly with the conclusion that the breathing space scheme should include non-credit arrears and with the committee’s incisive comments on how the over-zealous approach to enforcing government debt, including the routine recourse to bailiffs, should be addressed. We look forward to working constructively with policymakers to help them address the problems set out so cogently in the report.”