Taxation of Pensions Bill

Written evidence submitted by Towers Watson (TP 06)

Taxation of Pensions Bill: written evidence to Public Bills Committee

Towers Watson is a global consulting company with particular strength in the area of UK pensions. We have advisory relationships with the trustees and sponsors of over half of the 100 large st corporate pension schemes and also scheme s ranging down in size to £10m and less.

The B udget flexibilities for delivery of defined contribution (DC) pension savings were bold and pave the way for better member outcomes. They have been broadly – and rightly - welcomed.

Much of the finer detail is still awaited and, with an implementation date of 6 April 201 5 , this is presenting a challenge for pension providers – whether retail or ‘traditional’ occupational schemes – to deliver those flexibilities. However, this was inevitable and we commend the Government for not rushing to implement ill - thought - through tax ‘solutions’. We have been in correspondence with HMT, DWP and HMRC on matters of detail.

This submission focuses on a single issue within the Taxation of Pensions Bill - the effectiveness of the anti-avoidance measures and their impact on the durability of the new regime. Two specific measures exist :

1. A reduction to the threshold (£12,500 to £7,500) from which the tax-free cash recycling rules can apply. This is a motive-based test and, although in force since April 2006, we understand that it has rarely, if ever, been used. We do not believe that this is because it is an effective deterrent; rather we believe that it is (and will remain) unenforceable.

2. Once DC savings have been flexibly accessed, the annual allowance ( AA ) for future DC savings reduces to £10,000.

This latter provision is mechanistic and, at least in principle, a more effective deterrent . It is i ntended to dissuade individuals aged 55+ from repeatedly (annually) diverting up to £10,000 of salary into immediately - accessible pensions and drawing those savings i mmediately . In such circumstances, one quarter of the income sav ed would be come tax free and, if structured as a salary sacrifice arrangement, National Insurance Contribution savings w ould be available to both the employer and employee.

We agree that this will be a robust deterrent for those who might otherwise wish to contribute more than £10,000 to DC savings in a year . However , accordi ng to the Government [1] this covers less than 2% of DC savers aged 55+ , leav ing 98% who could reduce their tax bill (though some of these may want to increase pension savings once they can access money flexibly in retirement) .

Ministers , at times, appear sanguine on this matter – "we have tried to ensure that we do not give people an opportunity to use the new arrangements as a way of avoiding substantial amounts of tax … [and] concluded that introducing a reduced £10,000 personal allowance was the best way of striking a balance … ". [2] However, the Financial Secretary to the Treasury’s evidence to the Committee on 11 November seemed to bolster previous warn ings that " t he government will be closely monitoring behaviour under the new system" [3] . In his evidence, t he Minister suggest ed that, if loss accelerates, action will be taken .

We are concerned that such a cceleration – and the implied response - is likely; we are not reassured by the suggestion that few people will be tempted to try to get the tax benefits that are attached to retirement saving without actually saving for retirement . There are around 9m people over 50 in employment. Of course some of those will be younger than 55 or working part-time and earning very little. Some will be put off by the administrative inconvenience of making contributions and withdrawing them. And some will already be contributing (personally or with an employer contribution also) meaning that the scope for gain is based on the difference between existing contributions and the £10,000 AA. 

However, we believe that there may be many people who will consider taking advantage of this opportunity - particularly so if products are designed and marketed with this outcome in mind. With an AA set at £10,000 , the maximum income tax gain on offer through an immediate-vesting drawdown vehicle might be £300 - £400 a year for a basic rate taxpayer (net of say £100 - £ 200 charges) or £800 - £900 for a higher rate taxpayer. Moreover, i f £10,000 of salary is given up in exchange for an employer pension contribution , the employer could pay £1,380 less National Insurance while the employee would pay between £200 and £1,200 less (this time, higher earners gain less). This may also be something that employees can achieve on their own initiative where an employer that already offers salary sacrifice uses a pension provider that is developing "pension bank account" withdrawal facilities.

The Pensions Minister, when quizzing a witness to the Public Bill Committee on the Pension Schemes Bill (as opposed to the Taxation of Pensions Bill) on a similar point , highlighted that there are already potential wheezes created by the more liberal rules on small pots and trivial commutation . Against this backdrop, he suggested that, if there is any real appetite for avoidance, surely employers and employees would be collaborating to exploit these already?

It i s true that the Budget created scope for some people to avoid tax in 2014-15 a nd it is equally true that there is little evidence of widespread appetite to exploit it. However, both trivial commutation and small lumps are:

· Available only if the total benefit value is within a cap - £30K across all pension arrangements for trivial commutation and £10K within the scheme for small pots

· Available only to over 60s (rather than 55s from 2015)

· Required to exhaust all benefit entitlement under the scheme (post-2015, schemes could, but won’t be required to , permit members to cash in just part of their pot).

Further, a trivial commutation exercise can be undertaken only once, and it is administratively bureaucratic. So these approaches remain a world away from the avoidance risk created from April 2015 for those aged 55 and over.

T he essential point in all this is that it is a tax avoidance opportunity created by legislation currently before Parliament ; it is not dream t up by accountants. Taxpayers and businesses wishing to help their employees with the cost of living should know whether this is supposed to be a cceptable tax planning or avoidance to be frowned on (or stopped).

If the Government wishes to ensure that its framework actually delivers better member outcomes, it needs to be encouraging employers and Trustees to invest in supportive financial education. While the guidance guarantee will play a significant part in helping members to understand the choices with which they are (directly or otherwise) presented, a better understanding will be achieved if the ‘at retirement’ guidance is supplemented by broader financial education support, delivered over a longer period.

Businesses and Trustees need confidence that the Government both fully understands the potential opportunities for tax and national insurance ‘avoidance’ and that it has incorporated the associated costs within its planning. Education will have little value if the new system is not durable and faith in the pension system will be (further) eroded if education is provided, only to be undermined by changes introduced to tackle tax avoidance.

There are approaches that would make salary diversion unattractive – such as restricting the tax-free cash ‘entitlement’ attributable to DC savings made after benefits have been accessed flexibly , or setting the annual allowance at zero for people who have done so - but the re are considerable drawbacks to all of these and they have already been considered and rejected .

We are not suggesting an about-turn, but it is important that the new regime - which introduces very significant changes - is durable. If the Government is genuinely relaxed about those aged 55+ diverting up to £10,000 p.a. of salary into pension savings ( that are then drawn immediately ) , it should say so. If it i s not, then it should explain how it might dissuade this , while maintaining the integrity and cohesion of the new regime .

November 2014

[1] Paragraph 2.31 of "government response to the consultation" CM 8901, July 2014

[2] David Gauke: Official Report, Pension Schemes Public Bill Committee , 23 October 2014; c. 126, Q284

[3] Paragraph 2.33 of "government response to the consultation" CM 8901, July 2014


Prepared 18th November 2014