Freedom and choice in pensions
In the Budget the Chancellor announced a series of proposed changes to the tax regime for pension plans.
Some of those changes are now operational but more are due to start in April 2015.
The paper issued at the Budget – Freedom and choice in pensions – is open for consultation and we have prepared our views to share with government.
The consultation is open until 11th June and we would encourage all interested parties, individuals and firms, to submit their views.
Freedom and Choice in Pensions Consultation
Pensions and Savings Team
1 Horse Guards Parade
12th May 2014
Freedom and Choices in Pensions Consultation
We are pleased to provide our response as an organisation to the questions raised in the consultation.
We believe that the reform of the pensions tax framework is an important subject and that it is vitally important that changes once introduced enhance the at retirement choices for UK consumers.
1 Should a statutory override be put in place to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility?
Yes. It adds to the complexity and difficulty for pensioners if the scheme of which they are a member is out of line with generally recognised choices and options. Freedom and choice will be undermined where pension scheme rules prevent individuals from taking advantage of the increased flexibility.
2 How could the government design the new system such that it enables innovation in the retirement income market?
One way to stimulate innovation in the retirement income market would be to maintain a consistent tax regime for many years so that innovators can be confident that their products bought to market have a reasonable “shelf life”. Consumers will also benefit from a period of stability and be more confident in their product purchase.
Change creates real challenges for consumers who have reached a stage in their life where they are seeking stability. As an example the changes to the rate of extraction from Income Drawdown products has gone from 120% of GAD rates to 100% of GAD to 150% of GAD and now to an unrestricted rate of access all within a three year time frame.
Similarly constant changes to the level of tax allowable contributions and changing limitations on the amount of pension fund that might be accrued add degrees of complexity and uncertainty that mitigate against product innovation. The simplicity promised back in 2006 has simply not materialised in practice.
The Pensions Policy Institute paper Tax relief for pension saving in the UK contained some suggestions that are worthy of consideration.
It makes little sense to restrict both tax relievable contributions and restrict fund values one or the other might help to create an environment conducive to innovation.
3 Do you agree that the age at which private pension wealth can be accessed should rise alongside the State Pension age?
No. Freedom and choice will not be enhanced by having such a link between State pension age and the age at which private pension benefits might be accessed. Consumers can currently access their benefits from attainment of age 55 onwards thus enabling retirement well ahead of state provision. We fully accept that average life expectancy is being extended but if choice is important then one of the important choices must surely be the age at which private pension provision is accessed.
As the consultation paper itself states at 4.1 “A key feature of this system is that it breaks from the traditional notion of a fixed retirement “point” where most people make a one-off decision on the income they will live for the rest of their lives. As it becomes the norm for people to spend around a third of their adult life in retirement, and with an ever increasing number of people holding defined contribution pension pots, it is important the system is flexible enough to meet consumer needs across the whole of their retirement”
We do though appreciate that the current system does mean that some might access all of their pension fund well ahead of state pension age and does run the potential for some to fall back upon state benefit provision.
This is also another example of the constant change that makes both innovation of product and consumer planning for retirement so difficult. It was only in 2006 that the current age 55 point of access was introduced from the previous age 60 limit
4 Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief?
No see 3 above
5 Should the minimum pension age be increased further, for example so that it is five years below State Pension age?
No see 3 above
6 Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should pension providers be required to outsource delivery of independent guidance to a trusted third party?
Pension providers are probably the worst placed to be entrusted with this service. The consumer needs a trusted source of guidance and information. They also need a full understanding of the limitations of the guidance. Retirement planning is not restricted to the approved pension arrangements it encompasses the whole of a person’s financial resources. Without a full understanding of the consumers financial position, goals and objectives guidance will simply run the risk of setting them off on an inappropriate course of action.
Full support of the independent advice sector is needed to make this succeed. As a firm of Chartered Financial Planners we have a vested interest of course but government needs to recognise that the ABI members already struggle to provide basic information in a timely and understandable fashion. We have little confidence in their ability to offer a “conversation” with consumers at important key stages
7 Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust based schemes?
No. the provision of guidance should apply equally to both types of arrangements. Pensioners have in many instances little choice in the basis of the scheme of which they are a member (this is usually decided at employer level) and should be treated equally in terms of their access to guidance.
8 What more can be done to ensure that guidance is available at key decision points?
See 6 above. Make the regulation of independent financial advice more conducive to the needs of the consumer
9 Should the government continue to allow private sector defined benefits to defined contribution transfers and if so, in which circumstances?
Yes. Few people will be prepared to give up the guaranteed income that is available from a defined benefits in return for the uncertainty of defined contributions even with the freedom and choice being introduced but the choice should still be available. There are some circumstances where such a transfer can be beneficial (health and marital status issues for example) and consumers should not be deprived of the choice.
10 How should the government assess the risks associated with allowing private sector defined benefit schemes to transfer to defined contribution under the proposed tax system?
The government does not need to assess these risks as they are mitigated by the tax system being effectively neutral. Pension income from a defined benefits scheme is subject to income tax as is the ability to take the capital from a defined contributions scheme.