I wanted to make a couple of observations on the budget proposals for changes to the pensions legislation. The government issued a budget day document "Freedom and choice in pensions". Link to the document is below:
My observations are as follows:
This Reads Like a Treasury and not a HMRC Document: That is the overall tone is positive: this is a shiny new policy that will improve consumer choice in the pensions market, boost savings and make president Putin realize the error of his ways and retreat from the Crimea. An issue at the top of HMRC's agenda is pensions liberation - I wonder when they were informed their boss was planning a mass jail break?
This is coming really soon: The new system is to come into force from April 2015.
This might, really, be coming very soon: Normally the above points would be reconciled by the implementation date for the new system being pushed back to allow HMRC and providers to sense check the new system. However, there will be an election in the UK on 7th May 2015. Although the policy has been a political triumph its impact will be dissipated if the government is forced to announce they can't get the detail to work, so I think we will have something new in place by April 2015.
Specific Points from the document
The thrust of the proposals is summed up in the sentence :"The tax rules will be drastically simplified to give people unfettered flexible access to their pension savings"
That may be true although the government has a particular view of what is free and unfettered, the minimum age limit for drawing defined contribution benefits remains at 55 and will increase to 57. So the government is prepared to treat the public as responsible adults - as long as they are 57 or over.
There is a statement at paragraph 3.13 of the document that "The tax free lump sum(usually 25% of an individuals pot) will continue to be available.
Paragraph 3.17 of the document includes a discussion of the inheritance tax treatment of pensions. This includes an intriguing statement:"The government believes the tax rules that apply to pensions on death need to be reviewed to ensure they are appropriate under the new system. In particular the government believes that a flat rate 55% will be too high in many cases."
There are a number of changes to the existing rules that will apply from 6 April 2014 to 5 April 2015. These include: reducing the other income necessary to qualify for flexible draw down from £20k to 12k, allowing pension wealth of less than £30k to be taken as a lump sum (previously maximum £18k) and the capped draw down limit has been increased to 150%.
Those in public sector defined benefit schemes and individuals who have already taken an annuity will not be able to benefit from the new rules. Indeed it will no longer be possible to transfer from a public defined benefit scheme to a private scheme. The status of individuals in private defined benefit schemes is uncertain.
At 4.11 the document includes a statement: "The government want to ensure that consumers receive good quality guidance that meets their needs and choices. It is important that consumers know the advice they receive is focused on their best interests and not those of the provider."
In my opinion, successful implementation of this policy statement is crucial to the practical success of the reforms. Although there is widespread dissatisfaction with annuities I suspect annuities bought from the best buy table are a decent deal. Individuals may be unhappy with the level of income they get, but that might be due more to a combination of human nature, low interest rates and increased longevity than any market failure. But many consumers buy an annuity from their existing provider and pay over the odds as a result, if this could be prevented it would do far more to move pension provision to an optimal outcome than any amount of changing the draw down rules.
What should companies do now? It is difficult to say anything very definite on this point. Future products is obviously an interesting area but life insurance companies will employ people who know more about this that I do. However, I do think that there might be a general point for companies with employees aged (say) 50+. If these individuals were paid less but compensated with higher employer pension contributions then there would an employers and employees national insurance saving. To date the objection to this would be that individuals need a salary in the here and now, rather than a pension accrual. But if we are moving in to an era where the tax rules will be drastically simplified to give people unfettered flexible access to their pension savings perhaps this won't be such a big issue? Long term, I suspect this is too good to be true, indeed the IFS recently recommended imposing national insurance on employers pension contributions* http://www.ifs.org.uk/bns/bn130.pdf
So now might be a good time to look to maximize national insurance savings by way of employers contributions and might be attractive to employees as well.
* Thanks to Daron Gunson for pointing out
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