Taxation of Pensions Bill

Written EVIDENCE SUBMITTED BY ASSOCIATION OF CONSULTING ACTUARIES (TP 02)

Introduction and executive summary

1. The Association of Consulting Actuaries (ACA) welcomes the changes brought about by the Taxation of Pensions Bill 2014/15 and in particular the freedom of members to access savings in a manner that best suits their circumstances.

2. We believe the reforms will particularly benefit those with moderate pension pots and will help encourage individuals to save more.

3. In order to avoid abuse of the new flexibilities, we understand that the Government had to introduce measures to ensure that these new freedoms will not be abused. However, these measures add to an already overly complex regime. The regime is becoming so complex that most members of public will struggle to comprehend these complexities and may make inappropriate decisions as a result. We would prefer some genuine simplification of the pension tax regime but at the very least there should be clear information from HMRC in a form that the man in the street can access and understand. We hope that appropriate resources will be dedicated to producing this.

4. The ACA’s 1,750 members provide advice to thousands of sponsors of UK pension schemes, including most of the country's largest schemes. ACA members are also scheme actuaries to schemes covering the majority of members of private sector defined benefit pension schemes. Increasingly, actuaries are involved in advising on defined contribution schemes and in providing advice to individuals on their pension planning and arrangements.

Rationale for more flexibility

5. Prior to the budget announcement only those individuals with either very small pension pots or those with significant pension pots (such that they could secure a minimum pension income of £20,000pa) had flexibility around their pension pot. Although in theory individuals had the right to put their pension pots into drawdown, the regulatory burden around drawdown meant that few individuals could reasonably take advantage of this at a reasonable cost. The primary logic of the minimum income of £20,000pa was to ensure that individuals did not use all their retirement savings quickly and then become a burden on the state.

6. The introduction of the new single tier pension from April 2016 means that most individuals will be lifted out of means tested benefits and the requirement to prove a minimum income of £20,000 is therefore redundant.

7. As such, there seems no reason not to extend the same flexibilities to those with moderate size pots. However, there are other reasons why we believe this flexibility is appropriate.

8. The income needs of individuals in retirement are now more diverse:

· Individuals change jobs more frequently

· There has been an increase in the proportion of women in employment and a reduction in men in employment

· Part time work is now far more prevalent

· People are less likely to reach retirement married to the same partner that they were married to in their twenties

· Both partners in a relationship might have worked and built up pensions in their own right.

9. As such, the traditional design of a pension scheme that provides the main income to the primary earner and protection benefits at half or two thirds that level for a spouse and beneficiaries is less relevant to today’s workforce.

Benefits to those on moderate pensions

10. Currently, the average Defined Contribution pot at retirement is below £30,000. At this level, following tax law changes in March it may be possible to cash out such funds as "trivial". But if £30,000 is the average, very many will have pots of no more than £50,000. When converted to an annuity this might provide an individual with an income of less than £30 per week before tax.

11. For an individual who has perhaps been involved in manual work for most of their working lives, it might be a significant struggle to carry on working through to a State Retirement Age of 67 and with the ability only to be able to secure a modest additional weekly income there is no possibility of being able to retire prior to then. However, the flexibilities introduced into the budget mean that such an individual might be able to consider part time work or earlier retirement. For example, an individual with a pension pot of £50,000 might be able to contemplate retiring at 64, drawing on their pension pot up to State Retirement Age and then relying on State benefits thereafter or part time work over a longer period.

12. Being able to access retirement funds in this way means that individuals will more readily see the benefit of saving for retirement, particularly at a time when annuities are seen as poor value for money and inflexible.

Encouragement for individuals to save more

13. As such, the flexibilities tackle the most significant issue that individuals are not saving enough for retirement. We see this as a much more significant issue than the form that retirement benefits take.

14. Much of the debate around whether to annuitise or not ignores the point that individuals have not saved enough for retirement. As such, individuals are often faced with the unpalatable choice that they either annuitise, in which case the reality of not saving enough for retirement is made all too clear by a substantive drop in income and hence lifestyle; the alternative, which is to reduce the lifestyle to a modest degree, recognising that this may be for a limited period, and then rely on state benefits after that period is often the preferred choice, whether consciously or subconsciously.  Individuals can rationalise this on the basis that they will have the most income in the period of retirement when they are likely to be most active.

15. Furthermore, the initial experience by those in the pensions industry is that the changes have created greater interest in pensions and consideration of saving more for retirement.

Challenges with the new freedoms

16. We recognise that, in hindsight, some members may not make the best decision and spend more of their retirement savings than is sensible. It is clear from the success of the various pension liberation scams that there is an intrinsic demand for more flexibility. By creating that flexibility (available to all from, usually, age 55) but with the support of guidance, we would hope that the scams can be minimised. However, it is not just guidance that will be key but also the complexity of the regime.

17. In order to avoid abuse of the new flexibilities, we understand that the Government had to introduce measures to ensure that these new freedoms will not be abused. However, these measures add to an already overly complex regime. The regime is becoming so complex that most members of public will struggle to comprehend these complexities and may make inappropriate decisions as a result. We would prefer some genuine simplification of the pension tax regime but at the very least there should be clear information from HMRC in a form that the man in the street can access and understand. We hope that appropriate resources will be dedicated to producing this.

Flexibilities for Defined Benefit Schemes

18. For defined benefit schemes, we see that there is merit in allowing members to transfer from defined benefit arrangements to defined contribution arrangements to take advantage of the same flexibilities. We recognise however, that in the majority of circumstances that a transfer from a defined benefit scheme might mean the loss of valuable certainty and we think it right that there is a requirement for financial advice. In due course, we think it would be appropriate for similar flexibilities with appropriate advice requirements to be capable of being offered directly from defined benefit schemes and thereby avoiding some transaction costs for the member.

19. We would be happy to clarify or explain these points in more detail and would be happy to provide oral evidence to the Committee.

November 2014

Appendix: Survey findings in respect of the ‘freedom and choice’ reforms from the 2014 ACA Smaller Firms Survey

20. During the summer of 2014 the ACA conducted a survey of smaller firms’ (those with 249 or fewer employees) pension trends [1] where defined contribution arrangements are prevalent, where any pension arrangements presently exist at all. The survey attracted 414 responses and included a number of questions and responses in respect of the ‘freedom and choice’ reforms now encapsulated within the Taxation of Pensions Bill.

21. The survey found close to six out of ten of these smaller employers are supportive of the new freedoms spelt out in the reforms, with just one in ten opposed (see Figure 1). An even higher number, two-thirds, support in particular the removal of the remaining requirements for individuals to buy an annuity.

Figure 1 : Are employers generally supportive of the new ‘freedom and choice’ reforms?

1-9 employees

10-49 employees

50-149 employees

150-249 employees

All employers

Very supportive

21%

21%

15%

13%

18%

Supportive

35%

38%

41%

48%

40%

Neutral

10%

12%

8%

9%

10%

Not supportive

6%

5%

13%

22%

11%

Don’t know

28%

24%

23%

8%

21%

22. There is however less enthusiasm for the Government’s proposal that access to pension savings should move from age 55 to age 57 in 2028 (when the SPA moves up to age 67 with adjustments to the age thereafter keeping a 10-year gap between the two ages). Just 40% are supportive of this change with 32% opposed.

23. At the time of writing, the Government has not finalised its proposals on how the ‘guidance guarantee’ for those approaching retirement should work. The service proposed by the Chancellor aims to give those approaching retirement access to information to help them make an informed decision about how they should use their pension savings. As a result, it is unsurprising that across all sizes of employers, there is no clear view of the channels employees will use in seeking guidance. Where employers have taken a view, ‘face-to-face’ meetings are seen as likely to be the most popular channel, followed by web-based tools and then telephone guidance (see Figure 2).

Figure 2 : Employers’ views on the guidance channels that employees approaching retirement are most likely to use (in ranked order)

Ranking –

1 st ‘most likely’

1-9 employees

10-49 employees

50-149 employees

150-249 employees

All employers

Telephone guidance

4

4

5

4

4

Web-based tools

3

2

3

3

3

Face-to-face meetings

2

3

2

2

2

Won’t use guidance

5

5

4

5

5

Don’t know

1

1

1

1

1


[1] See 2014 ACA Smaller Firms’ Pensions Survey Preliminary Report (www.aca.org.uk – publications page)

Prepared 12th November 2014