Taxation of Pensions Bill

Written evidence submitted by Dr. Ros Altmann, CBE (TP 03)

This response is sent in a personal capacity, as an independent pensions expert

Summary:

· Some of this Bill’s proposals are in danger of losing sight of practicality and customer needs

· Requirements for those who access their pensions flexibly to notify all their other pension providers within 31 days and fines for failure to do so are unfair and unworkable in practice.

· These requirements are out of proportion to any likely tax leakage, indeed the ability to retain a £40,000 MPAA after cashing in up to three small pots of up to £10,000 each is likely to lead to far more tax loss than those failing to notify past providers about flexible access.

· Such requirements will disproportionately disadvantage the least well-off, who are least likely to have £10,000 a year to contribute to new pensions after flexible access and may not find time to trace old pensions until they are well into retirement.

· Wealthier individuals are more likely to have a financial adviser to help sort out their financial affairs and notify all old providers, whereas the average customer will struggle to find out who to write to, especially if still working and having little spare time.

· I suggest relying on people to obey the rules, as happens now in flexible drawdown, then penalising them if they do not.

· Alternatively, require those who have used flexible access only to notify new pension providers, or schemes into which members are actively contributing.

· I have concerns about communications sent by providers to customers, informing them about the lower Money Purchase Annual Allowance following flexible access. A standard form and wording is required, so individuals can understand what they are being told. There is too much risk of impenetrable jargon leading customers to inadvertently break the rules.

· There should be standardised official forms for pension statements for those reaching pension age. A simple one page summary of their pension account balance, type of fund and any special features, guarantees or penalties would help make the Guidance more useful and clarify entitlements for customers. Current ‘Wake Up Packs’ are often impenetrable and full of jargon, leaving customers confused and at risk of buying poor products.

· The FCA must require all pension providers to have a duty of care to customers buying retirement products, particularly if those products are irreversible, such as annuities. This means making at least basic suitability checks and providing risk warnings before selling a potentially unsuitable product.

The principles behind this Bill are, in my view, sound. Sweeping away the draconian restrictions on people’s pension savings is long overdue and allowing more flexibility is likely to increase the popularity of pensions as a retirement savings vehicle.

Nevertheless, there are elements of the proposed legislation which are likely to prove unfair or unworkable for many pension savers, particularly those who are less wealthy and do not have a financial adviser.

1. Requirements for customers using flexible access to notify all their other pension providers are unfair and unworkable.

This new aspect of the Taxation of Pensions Bill is impractical and will disadvantage many customers. To insist on people notifying all past pension schemes that they have taken some money under flexible access would place an impossible or unreasonable burden on too many people. The fines they would face are also draconian. Many may have only a small sum in an old pension scheme they have lost track of.

This element of the Bill is unworkable and unfair. It is difficult to comprehend why people should be fined for losing track of old pension entitlements. There are millions of ‘lost’ pension accounts and often people fail to trace them until they are retired and actually have some time to get their paperwork sorted out. Whilst still working, many people do not have the chance to go through all their old records or trace all their old pensions and savings accounts, yet they will face fines of £300 and further daily penalties if they have failed to do so. If people’s financial affairs are in good order, this would be less problematic, and those who are better off (and most likely to be able to afford £10,000 a year extra contributions) are likely to have a financial adviser who helps them with this task, whereas in practice most people with moderate savings do not. These are the people most likely to have untraced pension accounts, or to struggle to find details of how to inform their other pension providers. And these were the very people that the reforms were most likely to benefit. Therefore, imposing such a restriction on them risks undoing some of the advantages of the new regime.

The less-well-off moderate pension savers are more likely to need money from their pension fund but will find these requirements particularly onerous. Most will have no intention (or ability) to contribute more than £10,000 a year, but could face fines just because they lacked the time to trace old pension entitlements.

The Government should instead rely on fines for people who do break the new rules. People currently in flexible drawdown are not forced to notify all their other pension schemes that their Annual Allowance has reduced to zero. They are fined or penalised if they break the rules. This approach should, in my view, be adopted for the Money Purchase Annual Allowance.

This notification requirement is apparently designed to minimise losses to HMRC from extra tax relief. However, allowing people to cash in up to three pension funds of up to £10,000 and retain their £40,000 annual allowance is likely to result in far more tax leakage than from people failing to notify past schemes about flexible access and reduce MPAA.

Therefore, I believe the provisions of this Bill need to be amended. Ideally, the requirement to notify all other schemes should be removed. Alternatively, people should only be required to notify new schemes which they establish, or other pension schemes into which they are currently actively contributing (contributions made within the past 24 months perhaps).

2. Administrators should be required to use a standard form to notify customers about the lower MPAA after flexible access so they understand what is being said

Administrators will have to provide pension savings statements for members who have accessed their pensions flexibly, but can design their own communications. There is a significant danger that these will be unintelligible for most customers. They may have no idea what they are being told and then fail to act as they should, and ultimately face fines. I would like to see a standard official form that can be used by every company, rather than allowing each one to report in their own way. The form should explain the situation in plain English. Otherwise there is a danger that customers will simply not understand the language that providers will use in these communications.  For example, telling them

‘You have now taken an Uncyrstallised Pension Fund Lump Sum or have withdrawn money from your flexi-access drawdown account. As your pension fund has been accessed flexibly, we are obliged to tell you that you are now obliged to inform all other pension providers of schemes in which you have accrued pension entitlements that you have a reduced Money Purchase Annual Allowance of £10,000 (however if you have a defined benefit pension scheme your annual allowance for such accruals is £30,000) You are now under a duty to notify all past or present pension providers in which you have rights that you have accessed this pension fund flexibly.’   Who will understand that? 

Plain English version could be more like:

‘As you have taken more than your tax free cash from your pension fund (it’s called ‘flexible access), you can’t put more than £10,000 year into future pensions (although you can put in up to £30,000 into your employers final salary or defined benefit scheme if you have one). You must now tell every other company you have ever had pension savings or pension rights with, that your future pension contributions are restricted.’

This is more likely to be intelligible to the lay person, but of course consumer testing can refine the wording of standard forms to be as user-friendly as possible.

3. Government should consider tightening the recycling restrictions, so that future pension contributions can less easily be used for tax avoidance, rather than genuine pension accrual

If the Government is concerned about tax leakage, it should consider tightening the rules around pension recycling, so that those contributing to pension funds after taking any money from their pensions, whether tax free lump sum or flexible access, should have genuine pension-related, rather than tax-related, reasons for further pension contributions.

4. The Bill should require pension savings statements to be sent to all customers in a standard format, listing their accrued entitlements and scheme features

The Taxation of Pensions Bill requirement for a pension savings statement to be sent by every scheme after flexible access could also form the basis on which pension providers can be required to produce a standard official statement for every customer approaching scheme pension age. The Wake Up Packs sent out 6 months before pension age should contain a standard form that records the customer’s pension details – i.e. account balance, any penalties that may apply, the charges that are taken, any guaranteed annuity rate attached or any other special features. With this standard information, customers can take a clear record of their pension entitlement to the Guidance session or use the information to assess their options. Currently, the materials sent to members as the Wake Up Pack are impenetrable, far too long and full of words most customers do not really understand. A standard official form recording the essential pension information on one page would clarify the position and help people make better decisions.

5. The Bill needs to tackle the problem of providers failing to inform customers clearly when it comes to their pension options. Putting a duty of care on providers to send out clear statements and to make suitability checks and clear risk warnings before selling any products for pension withdrawals will help to avoid consumer detriment.

Currently, pension providers can sell decumulation products to customers without any requirement to take care about the suitability of that product for that customer. Not even basic suitability checks (such as asking about someone’s health before selling them a standard product that assumes they are in good health, when in fact they may have a serious illness). As there are likely to be more products in future and as some of them will still be irreversible or carry new types of risk, the company selling the product should be required to make at least some basic suitability checks and provide risk warnings to customers before selling them any product. In particular, asking about health and any unpensioned partner, as well as work status, should be mandatory. If people are still working, they are likely to benefit from just leaving their pension fund to accrue additional investment returns, but if they do not realise they have that option they may buy a product they do not need. Too many firms have sold unsuitable products to unsuspecting customers, but because they were not required to ask any questions, the company can claim the product had been mis-bought, rather than mis-sold. A duty of care requirement and basic suitability checks or risk warnings could prevent such consumer detriment. It is simply not enough to rely on the Guidance to protect customers. An extra layer of regulatory protection must be introduced, especially after such fundamental changes and the past market failures.

For these pension reforms to work properly, people must be able to make best use of their pension savings in later life. This will often mean leaving money in the Fund, rather than withdrawing it. Reaching pension age should not necessarily trigger fund withdrawals or flexible access, especially for those with other pension funds or who are still working. The past regime too often drove people, who did not need to take any money, to withdrawing funds earlier than they should and buying unsuitable or expensive products. In future, the pension regime needs to help people recognise the benefits of leaving money in their pension fund till they really need it, rather than taking it out.

November 2014