One of the things we sometimes take for granted is just how tax efficient a pension is, and we may not always get the clear benefits across to customers.
We talk about “obtaining tax relief” and ‘reducing tax bills”, and we introduce terms like “maximum net relevant earnings”! Is it any wonder people don’t find pensions that attractive? As an industry, are we more concerned about discussing the technical differences between PRSAs and EPPS, than about positioning the positive benefits of the savings vehicle?
So, how can we make pensions so compelling that they may even look too good to be true? Can we re-position the tax benefits of pensions by learning from other successful initiatives?
Learning from SSIAs
By far and away the biggest success in the Irish savings industry over the years was the Special Savings Incentive Accounts (SSIAs). In the 12 month period to April 2002, over 1 million people bought into SSIAs, and the majority of us saved consistently and regularly for 5 years. It was so successful that we accumulated over €14 billion of savings by the time they matured in 2007. Most importantly, they were simple — for every €4 you saved, the government added €1 — so you got a 25% free top up.
I’ve often wondered why the simplicity of SSIAs couldn’t be extended to the tax regulations on pension. There was plenty of talk over the years about applying SSIA thinking to pensions — but that’s never materialised through regulation. However, is it really needed? Are we not sitting on a gold mine opportunity that we haven’t yet exploited?
So what would you choose — A 66% return on your investment or 40% tax relief?
Anecdotally, most people would choose the 66% return -partly because it’s a higher number and partly because they may not fully understand tax relief. However would you be surprised to know they are both the same?
Now imagine if you said to a customer that we have an investment opportunity that provides a 66% return whilst taking no risk? They might think it’s too good to be true? Well that’s what a pension is for a high rate tax payer.
By investing €1,000 in a pension — the net cost is €600 (40% tax relief) and the pension value on Day 1 is €1,000. So a net investment of €600 creates an immediate pension pot of €1,000, a risk free return of 66.6%.
More than twice as good as an SSIA?
Going back to the SSIA comparison — imagine if you told your customers that you had an investment that was more than twice as good as an SSIA? Well for an SSIA — for every €4 invested, the government added €1 — giving a 25% top up For a pension — for every €3 invested by a high rate tax payer, the government supplements this with €2 – giving a 66% top up.
Put it another way, to achieve a €5 savings pot — a high rate tax payer only has to invest €3 in a pension – whereas with an SSIA, they had to save €4.
Of course, there are very different tax treatments on the way out- but this is just a simple comparison to show the benefits of tax relief in a customer friendly fashion.
So now we have two new propositions to talk to customers about:
• An investment that provides an immediate 66% risk free return, and
• An investment that’s more than twice as good as an SSIA.
We need to get more people saving and people saving more.