Taxation of Pensions Bill

Written evidence submitted by ABI (TP 13)

INTRODUCTION

1. The Bill legislates for the announcements made in the Budget 2014, to allow people aged 55 and above to access their pension savings as they wish, subject to their marginal rate of income tax. The new rules are planned to take effect from April 2015.

SUMMARY OF ABI POSITION

2. The industry strongly supports the reforms in principle. They should give people a greater sense of ownership of their pension pot and lead to more pension saving which is critical if people are to have a dignified retirement. They are also consistent with the direction of changes we had campaigned for: in particular, allowing access to higher lump sums (through changing trivial commutation and small pot rules), and greater flexibility for retirement products to adapt to paying for social care.

3. The objective of the reforms has to remain focused on giving people more choice in generating income from their retirement pots in a way which works for their personal circumstances - not simply to access their savings much earlier than when the vast majority of British workers plan to retire, which for most people would not be the right choice.

4. The industry supports the reforms, we want them to be a success and our members are working flat out to get everything ready for April 2015. However, although the tax position is becoming clearer, ongoing work on how the regulatory aspects of the new rules will work in practice, and on what the guidance for savers will look like, needs to be taken forward as a matter of extreme urgency. Government and regulators need to work together with the industry to ensure customers have access to flexibility with a level playing field between products and providers. We need certainty and no headline-driven announcements if our members are to be able to help make the reforms a success, all at the same time as helping employers automatically enrolling thousands of employees, implementing the charge cap and governance reforms, and taking part in a major legacy audit.

KEY ISSUES

Pension flexibility, not early access

5. Pension reform is about building assets for income in retirement for a much larger part of the population.

6. The Government has implemented a compulsory framework for employers, which is designed to create a savings culture for long term financial resilience in old age. Automatic enrolment has seen millions more people saving for their retirement and further pension reforms should build on this.

7. We are therefore very concerned that the focus of recent discussion on the Budget reforms has been about early access to cash at age 55 rather than on giving people more choice about how to use their pension savings to generate retirement income. At age 55, people may have 30 years of active life ahead of them including potentially significant care costs. For most people, depleting their pensions at the age of 55 will therefore be a poor decision that could easily lead to straitened circumstances later in retirement and reliance on the state for care costs. Narrowing down the debate to access to cash at age 55 also has the potential to deal a fatal blow to the Government’s wider reforms of encouraging people to work for longer, and making society more financially resilient – both critical if the UK is to navigate the challenges of an ageing population successfully.

8. This underlines that we need to refocus the debate on managing incomes in retirement and the choices and decisions people face from working age through to retirement.

Consumer information and advice

9. Giving customers more choice is welcome but it is also imperative to recognise that good guidance and advice is vital to prevent people making decisions which could lead to retirement poverty and / or to them giving up valuable benefits. Providers are therefore committed to ensuring that the new pension guidance service succeeds and is valuable to people considering their retirement options. The recent Government clarity that the Citizens Advice Bureau will provide face to face guidance and that telephone guidance will be provided by The Pensions Advisory Service is a step forward.

10. However, not all savers will take up the guidance, and the potential for scammers to become active in this market is clear. With the take up of guidance uncertain, it is essential that the Financial Conduct Authority (FCA) develops appropriate safeguards in time for next April. We believe it is essential that providers of all retirement products should highlight risks to consumers in a consistent way, and would like the FCA to clarify what providers are able to say when interacting with their customers. Equally, all of us including Government and regulators should intensify our efforts to guard against fraudulent activity.

11. Many people will struggle to understand the tax consequences of these reforms. Apart from tax free lump sums, withdrawals from pension pots are taxable pension income and this may not be fully understood. Not only may people find themselves unexpectedly paying higher rate tax, it is possible that some will be unaware that their tax may not be settled for a year after they have accessed their funds through a self-assessment process that they may be unfamiliar with. Again, this shows the need for the guidance service to be high quality and effective, highlighting the tax consequences of pension withdrawals, and for the FCA to be clear about its expectations of providers where customers do not take up the guidance.

Tax and regulation: need for clarity and level playing field

12. The regulatory rules affecting a number of key changes in the Bill are not yet clear. We are discussing these points with the Government and the FCA, but without urgent clarity there is a risk of some customers not being able to access flexibility and of an uncertain environment and uneven playing field between different types of product and providers. This is not solely the role of the FCA – it requires coherent and achievable measures from the Treasury, HMRC, the Department for Work and Pensions, the FCA and the Pensions Regulator.

13. For instance, the FCA is urgently considering the regulatory position around accessing a pension pot in one lump sum – whether through Flexi-Access Drawdown or an Uncrystallised Funds Pension Lump Sum – but the longer this remains unclear, the more difficult it is for providers to plan and develop requisite systems.  This is despite that taking a pension pot in this way was a key expectation raised as a result of the Budget reforms. Similarly, the whole regulatory regime around the Uncrystallised Funds Pension Lump Sum route which forms the basis of the Government’s ‘pension bank account’ analogy has yet to be resolved. In addition, there could be gaps in regulation between contract-based and trust-based schemes in two key areas. Firstly, how drawdown in trust-based schemes will be regulated; secondly, protection for customers and expectations of providers, if a customer wants to transfer out of a defined benefit scheme after receiving advice not to do so.

14. Providers welcome the sensible reduction of the 55% tax charge on death, which the ABI had previously asked the Government to consider. The 55% tax charge had stood in opposition to the wider Government policy of making pension saving more popular by giving people more options on how to use their retirement savings. However, without further clarification it creates an advantage for drawdown customers over annuity customers, which will change behaviour. To ensure that the policy is not skewed against income, tax on pension payments to a beneficiary after the customer’s death should be treated equally, whether paid through an annuity or drawdown, as income or as a lump sum.

Product innovation

15. Providers will respond positively to the 2014 Budget reforms as the new rules should allow for better product solutions to be offered to cope with historically low levels of interest rates and high levels of longevity in retirement. There are already annuities with potential for growth, and drawdown with guarantees, and we can expect new variations on these.

16. Two changes to the Bill would enable providers to make further use of flexibility:

· Extending the maximum period for a short-term annuity in a drawdown contract from five years, which is unnecessarily restrictive, to a much longer period such as 25 years. This would allow customers to access a guaranteed income for longer, potentially at higher rates, while benefiting from the flexibility of drawdown.

· Allowing existing capped drawdown customers to designate further funds to capped drawdown arrangements within the same scheme. At present, the Bill only allows further designation to the same capped drawdown "arrangement", but this could inadvertently rule out some customers from continuing in capped drawdown.

17. However, the regulatory regime and the tax framework will be critical to the degree of innovation possible in the post-April 2015 market. Both conduct and prudential regulators will need to take sensible and proportionate approaches to the sale of new products and the capital required behind them, if the Government's ambitions for an innovative market are to be fully met.

Measures to remove tax advantages

18. The changes to the retirement tax framework could have created significant opportunities for individuals taking unfair tax advantages. The Bill implements sensible and welcome measures to prevent this, which the ABI strongly endorses. Once an individual has made use of the new flexibilities, for example drawn down more than their tax-free lump sum, they will still benefit from tax-incentivised pension saving, but their annual allowance will be reduced to £10,000. This makes it clear that people cannot exploit the Budget reforms by using them for tax planning purposes through avoiding tax on earnings. At the same time, it ensures that individuals can safely access an existing pension pot flexibly (such as due to redundancy or ill health, or because they want to support their children) but still save into a pension later.

19. Reducing the annual allowance for savers who have accessed flexibility goes with the grain of consumers’ current understanding of how the system works and does not expose consumers engaged in normal saving behaviours to the risk of inadvertently being caught by rules designed to prevent tax avoidance.

Social care

20. When the Budget reforms were announced, the Government was clear that the flexibility created was an opportunity for product providers to create solutions for older people who wanted to make provision for their care needs.

21. The ABI signed a Statement of Intent with the Department of Health in January 2014 demonstrating the willingness of providers to be part of society's response to the challenge. Of equal importance is the need to develop the demand for care products through a government led public awareness campaign and we are pleased that the Department of Health is taking this forward. A well informed and active market for care will enable providers to develop and grow the market for long term care products.

22. However, we are concerned that a continued focus on early access at the age of 55 means that there may be barely enough in the pension pots of some savers to cover their near-term retirement income needs, let alone enough left to stretch to care costs in older age.

Investment in infrastructure

23. The insurance industry plays an essential part in the UK’s economic strength, managing investments of £1.8 trillion - equivalent to 25% of the UK’s net worth. If the momentum towards early access continues, the prospect of the pension sector providing long term investment fuel for economic growth is reduced. Pension providers, whether trust based occupational schemes, contract based schemes, or retirement income providers, will face greater requirements to be ‘liquid’ from age 55.

24. The long-term nature of annuity books helps the insurers who run them to invest in the UK economy, especially in long-term projects like infrastructure. If pensioners take more of these assets at the point of retirement and keep them in a bank account or invest in other assets (such as buy-to let), the long term investment effects for the UK economy from the insurance sector over time may be significant.

November 2014