FREEDOM AND CHOICE IN PENSIONS

Transcription

1 FREEDOM AND CHOICE IN PENSIONS Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document Freedom and choice in pensions ( the Consultation ) published by the Treasury on 19 March We understand that the Consultation is an opportunity for interested stakeholders to provide input into how the new flexible pension system will operate. We provide answers to the questions raised in the Consultation at section 2 below. We also provide further commentary on other issues, not specifically covered by the Consultation questions, but which we feel do need to be considered before finalising the details of the proposed reforms. 2 Our responses to the questions 2.1 Question 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? We consider that the pension scheme rules should be determined by the market as far as possible and that the Government should abstain from imposing any restrictive rules. Provided transfers can be made from one defined contribution scheme to another, then we see no need for special override rules. Market competition should ensure that pension providers do not make their scheme rules too onerous, as individuals will simply move their funds elsewhere. 2.2 Question 2: How could the Government design the new system such that it enables innovation in the retirement income market? We suggest that it is best left to the market to create innovation. The new system should have minimum Government intervention if it is to achieve the aim of creating a more competitive and dynamic retirement income market. In the short term, it may well be that annuity sales will continue to slump but once the dust settles, we may find that people make positive decisions to purchase annuities, especially if they want a steady and secure income and are inexperienced and cautious investors. Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 2.3 Question 3: Do you agree that the age at which private pension wealth can be accessed should rise alongside the State Pension age? Question 4: Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief? Question 5: Should the minimum pension age be increased further, for example so that it is five years below the State Pension age? The Association appreciates that increasing the age at which private pension wealth can be accessed alongside the State Pension age could ensue that people accumulate sufficient funds. However, we are concerned for people who may find themselves made redundant at, say, age 50. Although there should be no discrimination about employing older versus younger staff, opportunities to find further employment at this age can be rather limited. Therefore, the ability to access pension savings could prove useful as it could provide someone with the capital to set up in business or simply provide funds to live off without having to depend on welfare benefits. Furthermore, with the State Pension age increasing, some people may wish to gradually transition into retirement and move from full time to part time work and use private pension savings to supplement a reduced income. Allowing people the ability to make these life choices would be introducing true flexibility into the system. To increase the minimum pension age further, so that it is only five years below the State Pension age would increase our concerns for the above mentioned individuals. There would also need to be safeguards in place to cover instances where withdrawals are required in cases of ill-health. Consideration should be given for specific occupations where it is unreasonable to expect employment to continue into the late 60s or early 70s. We believe that, whatever the minimum pension age, it should be applied to all pension schemes which qualify for tax relief to ensure consistency. An overriding aim of the new system, aside from increasing flexibility, is to produce a clearer and fairer system for all. 2.4 Other issues not specifically covered by the above questions, but which the ATT believe need careful consideration: The ATT is particularly concerned about the impact the reforms to the pension tax framework will have on PAYE systems. When the rules become effective, there will be a large increase in the number of PAYE schemes needing to be opened to administer payments to people wishing to take benefits as soon as possible. In many cases, the schemes may only be needed for oneoff transactions. It is not clear at the moment as to whether the responsibility for administering the PAYE on these schemes will fall to the pensioner or the pension provider. At present, it is the provider of the annuity who deals with PAYE matters, but under the new framework will this responsibility pass into the hands of many more individuals who have little, if any prior P/ATTTSG/Submissions/2014 2

3 knowledge of PAYE matters? There needs to be clarity on this issue. We have also identified a number of other concerns:- Name of the scheme: Large insurance companies may prefer to have a master scheme whereas others will require individual arrangements for each individual pension fund, to ensure that Trustee and Pension Law is covered and liabilities from one fund cannot be related to others. Different considerations may apply in each case, and if a master scheme is to be available (or mandatory) will legislation be needed to allow or force its use? Single payments: The new rules clearly envisage the possibility of the full fund being withdrawn on one occasion. If this is so, will Real Time Information (RTI) apply? Will a new scheme be needed for a single transaction? This could make the cost of a single drawdown very high for small sums of money. Rate of tax / Code number: If a single payment is taken then the PAYE scheme must apply annual rules to prevent overpayment followed by repayment within the same tax year. For very small sums to taxpayers who are not likely to be higher rate taxpayers, the rate of 20% could apply. However, for most, the payment will have the potential to move them into the higher rate tax band. Will these people have to register to complete a self-assessment tax return or could they be dealt with through some other route, such as P161 assessment? Should the deduction be at 40% (unless it is clear that 20% will apply to the whole payment) because it will be difficult to recover underpaid tax from pensioners after drawdown, particularly if the fund withdrawn has been spent on a consumable (e.g. a car)? If it is considered better to overtax, then an efficient and speedy repayment arrangement would be needed at the end of the tax year. More than one payment: If the taxpayer has the ability to draw down from more than one fund in a tax year, how will HMRC be able to apply the correct tax codes so that the correct amount of tax is collected in the year? A system that allows full flexibility is likely to lead to many more tax positions needing to be reconciled after the year end. Does HMRC have enough resources to cope with this on a timely basis? Real Time Information (RTI): This system, which is still in its early stages, will have to be revised to incorporate pension drawdown situations. For example, the notes and helpline scripts must incorporate how to set up a scheme and the system must allow for single payments, irregular payments and allow for the requirement to pay NI to be deleted. We consider that it will involve a lot of work incorporating the new rules surrounding PAYE issues for drawdowns into RTI, which is still in its infancy, with many of its own issues still to P/ATTTSG/Submissions/2014 3

4 resolve. The ATT is concerned about the effect this will have and the increased burdens on taxpayers, employers and HMRC staff. 2.5 Question 6: Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should the pension providers be required to outsource delivery of independent guidance to a trusted third party? We suggest that any guidance is best provided by independent third parties where they have no financial interest in any given course of action. However, we can foresee issues with who would be willing or able to offer this service and how it can be delivered at a reasonable cost. Furthermore, the independent third party should only be expected to engage with the individual on an execution-only basis. This would ensure that the possibility of any claims against the third party would be limited because the individual has had to make their own decisions and confirm in writing that they have not received any instructions as to a course of action to follow. Failure to follow this route could potentially increase insurance costs within the profession to such a level that good advisers become unwilling to be involved. Our members do not provide specific pension advice, unless they are also separately and appropriately qualified in that area. Individuals who are solely ATT qualified, would not be involved in the proposed arrangements. Therefore, our comments are not influenced by potential claims against our members. We also believe that it is vital that members of the public understand what service they are receiving. At the moment there is no regulatory definition of Guidance. The provision of advice (as opposed to guidance ) requires stringent rules to be followed to ensure suitability and, given volumes and costs involved, this will most likely only be practical for those with existing advisers or larger funds. Advice must also only be provided by authorised and qualified advisers. It is very difficult to advise on a standalone financial issue, e.g. taking income from one pension. For proper retirement planning, consideration needs to be given to an individual s particular circumstances covering wealth, health and family. We are concerned that guidance, in this context, will become restricted to the provision of information to make self-directed / execution only decisions. Whilst we are in favour of only providing guidance to allow people to make their own decisions, we can see risks here of people believing they have received advice and the distinction will need to be made clear to them. To ensure that the guidance or advice provided is timely, there needs to be plenty of advance information available as people approach retirement. Pension providers need to be considering issuing standard communication letters at set points, i.e. at five years to retirement, twelve months, six months etc. P/ATTTSG/Submissions/2014 4

5 2.6 Question 7: Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust-based pension schemes? We do not believe that there should be any difference. 2.7 Question 8: What more can be done to ensure that guidance is available at key decision points during retirement: We think that there is a strong case for the costs of any independent guidance or advice to be paid from the pension fund without the pensioner incurring any further tax charge. 2.8 Question 9: Should the Government continue to allow private sector defined benefit to defined contribution scheme transfers and if so, in which circumstances? The ATT recommends that this type of transfer should only be allowed for short periods of employment. An exception could be provided which is similar to the old rules that allowed the commutation of superannuation contributions to a lump sum, where employment had been for less than two years. The new provisions could allow the transfer from a defined benefit ( DB ) scheme to a defined contribution ( DC ) scheme where the employment was for a short period of time (say, two years or less) and / or where the amount of the transfer was below a specified limit. We agree that if there is some way to provide the same increased flexibility to members of DB schemes that would be desirable. However, we appreciate that a large scale migration from DB schemes to DC schemes needs to be avoided. Although there may be a dramatic increase in DB members enquiring about transferring, it is quite possible in the vast majority of case that remaining in the DB scheme will still be the best result for individuals. There is therefore perhaps some scope for considering extending the offer of impartial guidance / advice to DB scheme members. The concern is that if they are simply left out of consideration, there may be a flurry of transfers that take place before April 2015 that are ill-advised and people may end up making unsuitable transfer decisions simply because they feel panicked into a reaction. The ATT has been made aware of some aggressive marketing from advisers who are approaching DB members with a transfer now whilst stocks last message. In reality there may only be very few scenarios where a transfer from a DB scheme would be advisable. If, by extending the impartial guidance to DB members, a review could be made of the number of cases in which a transfer to a DC scheme is beneficial, then it might allow the Government to consider allowing transfers, further down the line perhaps, under certain prescribed circumstances. There is also a concern that employers might look to accelerate DB scheme closures and wind up pensions, although the timescale until the reforms come in may well keep these cases to a minimum. Therefore, although, we are in agreement that there should be some restrictions applied when considering DB to DC transfers, and we have outlined a suggested way to impose restrictions, P/ATTTSG/Submissions/2014 5

6 we advise that consideration be given to including DB members in the provision of guidance in some way, to try to avoid bad or rushed decisions being made prior to the implementation of the reforms and also as a way of gathering further detail about the circumstances in which transfers would actually be beneficial. 2.9 Question 10: How should the Government assess the risks associated with allowing private sector defined benefit schemes transfers to defined contribution schemes under the proposed tax system? Due to the long timeframe of schemes, there will always be periods of surplus and deficit. The Government need to be mindful that a good scheme will wish to minimise withdrawals at all times to allow the smoothing of returns and contributions to achieve the actuaries objectives. Interference of any kind in that process leads to unexpected and undesirable results. This should be taken into account is assessing the risks of allowing transfers from DB to DC schemes. We also make the point that the Pension Protection Fund (PPF) is funded by private defined benefit schemes and if there are fewer of these schemes then there are fewer of them to share the burden of the PPF A4: The Government would welcome views on any potential impact of the Government s proposals on investments and financial markets: This is not an area on which we are able to comment. 3 Conclusions 3.1 In our responses to the questions raised in the Consultation, we have shown that there is still much to think about and many details to iron out before the reforms are due to be brought in next April. We would be happy to discuss further any issues raised in this response. 3.2 Contact details: Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Alison Ward, on or at award@att.org.uk. Yours sincerely Natalie Miler President of the ATT P/ATTTSG/Submissions/2014 6

7 4 Note 4.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,500 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2014 7