It is concerned the interaction of allowances and reliefs are too complex, leading some policy holders to overpay.
Rachel Griffin, tax and financial planning expert with Old Mutual Wealth, branded the current arrangements across the UK savings income spectrum as a “Frankenstein’s monster” with “numerous bolt ons”.
The report, called ‘Savings income: routes to simplification’, notes that having different calculations for full and for partial surrenders is a “significant complication” and relying on “HMRC discretion for review on a just and reasonable basis is not an ideal solution”.
“It is possible that some taxpayers do not realise that relief is available for excessive gains and simply accept the position as presented to them,” according to the OTS.
The way in which the gains on such policies interact with the tax system is complex, and the OTS believes that this area of savings taxation warrants further review.
“Relics of the past are lingering in the tax system and when combined with additional rules have created something like Frankenstein’s monster,” said Griffin.
“Instead of being a coherent well-oiled system the taxation of savings has had numerous bolt ons, which makes the whole thing confusing for the industry let alone consumers. The issue with the savings industry is not that it isn’t working but that, in some respects, it’s easier for people to take on debt than to ascertain the most tax efficient way to save.
“The OTS is already undertaking a inheritance tax review and has made it clear that saving and wealth is a top priority. The review of savings considers a wide range of reforms to ISAs, pensions and life policies. Savings plans often include multiple, if not all, of these products and so it is encouraging that the review is looking at the savings landscape as a whole rather than just some aspects in isolation.
“A personal tax roadmap would go a long way in helping people understanding how to navigate what seems to be a multi-dimensional maze of tax and provide transparency to the tax payer.
Partial withdrawals
For partial withdrawals above the cumulative 5% allowance, attempting to calculate the proportion of any economic gain that should be attributed to that withdrawal is potentially complex, the OTS report finds, both at the point of withdrawal and at the end of the policy when a finalised gain calculation is needed.
An administrative option to simplify the taxation of partial withdrawals without substantially changing the tax calculation, the OTS moots, would be to mandate a vertical calculation in cases where the withdrawal exceeded the cumulative 5% allowance. The OTS argues this would remove the potential for disproportionate gains and apply a consistent approach. However, the report conceded it is possible that encashing segments in this way would cause a tax charge to arise in circumstances using more flexible segmented policies.
