The cost of incentives for retirement saving

Incentives for retirement saving are in the policy headlights in both New Zealand and the UK. This post attempts to compare the cost of these incentives, allowing for the different size of population and different systems used.  It’s not very elegant, but it is one way of showing just how costly UK pension incentives are.

New Zealand: For every dollar a KiwiSaver member contributes, the government pays 50 cents up to an annual limit.  In the 2015/6 year, this Member Tax Credit is expected to cost around NZD 700 million. Around NZD 225 million was paid each year for the kick-start payment to every new member, which had been a feature of KiwiSaver since its launch, but was discontinued in early 2015.

UK: Pensions are tax incentivised on a different basis to the New Zealand system, as explained here. The cost to the UK government of this system can be taken in a couple of ways:

“…the gross cost of pensions tax relief is significant. Including relief on both income tax and National Insurance contributions, the government forwent nearly £50 billion in 2013-14…”

Of that £50 billion, £34.3 billion was in income tax relief on contributions and on the investment income of pension funds.

“The government also receives tax revenue from pensions in payment. In 2013-14, the government received £13.1 billion in tax on pension payments. It could therefore be argued that the net cost to the Exchequer from pensions tax relief in 2013-14 was £21.2 billion.” [£34.3 less £13.1]

If we go with the lowest figure of £21.2 million, it is still not quite the right comparison with the KiwiSaver MTC figure:  the tax on UK pensions payments comes from pensions contributions in previous years on which tax relief was granted.  So we are muddling up cohorts of tax payers and savers, but we are at least comparing annual net costs to the tax payers of each country.

Simply comparing the two: the annual cost to the UK government of incentives for retirement saving per capita of population is around five times the closest equivalent for KiwiSaver.

This is some way from being an exact comparison, but it shows that the cost in the UK is relatively very high. The generous UK incentives have not resulted in obviously greater success. So it is quite fair to ask whether policy objectives could be achieved at a lower cost to UK taxpayers, especially since auto-enrolment and pensions freedom are dramatic reforms with the objective of encouraging pension saving.

Approximations in this calculation

This isn’t asking which country has the best policy or whether either country has the right policy settings – that would depend on policy objectives. A value for money calculation would look at the benefit side of the equation as well as the cost. Some indication of what this might tell us is given here.

The cost of any tax advantage in the invest phase isn’t included for KiwiSaver, but KiwiSaver investing is usually in a Portfolio Investment Entity (PIE) fund, the taxation of which is the same for non-retirement saving in a PIE. The cost of relief from Capital Gains Tax in the invest phase isn’t included for UK pensions, as HMRC find it too difficult to estimate that.

The cost of Member Tax Credit to non-KiwiSaver alternative retirement savings vehicles has not been included, but KiwiSaver  dominates the market. The cost of incentives for non-retirement saving in KiwiSaver – the First Home Deposit Subsidy – is not included here.

The target market for the retirement savings incentives is different in each country: there is no minimum age for joining KiwiSaver but only people aged 16 or over can join the UK’s NEST scheme for example. The cost of incentives falls to all tax payers. The total population of each country has been used as a simple way to convert total cost to a per capita cost, using mid-2014 numbers.

While allowing for the effect of New Zealand’s Budget 2015 (the removal of the kick-start), no allowance has been made for changes to the cost of UK tax relief from the latest (2013-14) figures.

The exchange rate between pound and NZ dollar has moved between NZD 2.15 to 2.45 per 1 GBP in the 3 months to early September. The above uses the average of 2.30.

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