Taxation of Pensions Bill

Written evidence submitted by National Association of Pension Funds (NAPF) (TP 14)

Overview of NAPF response


1. The National Association of Pension Funds (NAPF) is the voice of workplace pensions in the UK. We speak for over 1,300 pension schemes that provide pensions for over 17million people and have over £900billion of assets. We also have 400 members from businesses supporting the pensions sector.

2. We aim to help everyone get more out of their retirement savings. To do this we promote policies that add value for savers, challenge regulation where it adds more cost than benefit and spread best practice among our members.

General comments

3. This Bill is an important part of delivering Freedom and Choice. Our primary concern is that the required structures and frameworks to enable schemes to begin to build Freedom and Choice capability for savers are in place well in time for April 2015. The timeline for implementation is very tight, and the Government needs to focus urgently on the delivery and implementation of the provisions of both this Bill and the Pension Schemes Bill.

4. Across the Freedom and Choice agenda there remain a large number of issues on which schemes require urgent clarity and which Government needs to address well before next April. We have included as Appendix 1 a list of "known unknowns" that summarise the questions that remain to be resolved in order for the full range of freedoms to be available to members of defined contribution (DC) schemes and for the implementation of Better Workplace Pensions to take place. A number of these will be resolved once this Bill gains Royal Assent, though the vast majority depend on the passing of the Pension Schemes Bill through Parliament and subsequent regulations.

5. In order for the wider reforms to the pensions landscape to be successful, it is essential that schemes are able to communicate the new and often complex options clearly and simply to savers. Concepts like "crystallisation" will be important to understand when the new freedoms come into effect, yet they will be difficult to convey and are poorly understood by the average saver. We encourage the Treasury and providers of the Guidance Guarantee to work with our members to develop simple ways of communicating the available options to members.

Provision for pension flexibility

6. We support savers being given greater freedom and choice over what to do with their pension savings at retirement. However, in an environment in which savers are able to choose from a wider range of options at retirement than ever before, the need for them to be supported in making a decision has never been clearer. According to our 2014 Workplace Pension Survey, only 19% of savers feel very confident in knowing what to do with their savings even now, with only 14% of respondents saying they will not need any guidance whatsoever [1] . Individual confusion and bewilderment stands to increase significantly in an environment of greater freedom and choice.

7. Next April will be a particularly confusing time for those retiring, particularly as they may find that certain freedoms and options that they have heard about may not be offered by their particular scheme, which may not by then have developed the systems to deliver the full range of freedoms. Additionally, some new products on the market may carry costs and risks that are not immediately clear to consumers and some may only be accessible through a financial adviser, which could carry costs that many individuals will be unable or unwilling to meet. Fewer than half (43%) of respondents to our Workplace Pension Survey indicated that they were willing to pay anything towards financial advice, with only 3% willing to pay more than £300. Recent research has indicated that advice on converting a £100,000 pension fund into a lump sum and annuity would cost a median of £1,500, with advice on a £200 per month pension contribution at a median cost of £500 [2] .

8. Even with the help of Guidance, some savers may be unable or unwilling to make a decision, and it is important that they still have access to decent retirement outcomes. Pension schemes can potentially help their members decide how best to access their retirement savings by using their expertise to highlight options that offer good value for money and have high standards of governance, communication, investment and risk management. This is a development that should be encouraged by Government within schemes that have robust governance arrangements that ensure they are acting in their members’ best interests. Trustees should be able to direct and support their members in this way without being deemed to have given advice.

Drawdown pensions and p ension payments out of uncrystallised funds

9. Given the late arrival of legislative certainty, we expect few trust-based schemes to be able to offer either flexi-access drawdown or uncrystallised funds pension lump sums (UFPLS) by April 2015.

10. Savers who want to access flexi-access drawdown or partial UFPLS but cannot do so through their existing schemes will need to turn to the retail market and transfer their funds. The market in mass market drawdown products is itself not yet developed and savers may face a significant premium on charges in default accumulation funds, through higher charges and advice costs. The ongoing costs to savers could prove excessive for those with modest pots and, while some Mastertrusts may eventually offer new lower cost drawdown solutions, it is not yet clear that trustees of other schemes can direct their members towards them, or how members will be able to gain access to these solutions on the open market.

11. We are concerned that there is a gap between what has been promised by the Government and the media in terms of Freedom and Choice – for example, that savers will be able to access their pensions "like a bank account" from April 2015 - and what will actually be available to retirees in April. This may prove confusing and frustrating to savers, many of whom may revert to choosing either the easiest or most heavily-promoted option, which may not deliver the best outcomes. The Government must be careful not to fuel media expectation of retirement solutions that schemes cannot deliver in the short to medium term and, along with the FCA, must be alert to the risk of over-promotion of high-cost, poor value solutions that do not deliver good member outcomes.


12. Even after April 2015, the Government should expect annuities to play a key role. Our research indicates a widespread preference among savers for certainty over flexibility [3] . 82% of respondents in our Understanding Retirement research stated that they wanted their pension to provide them with a regular income throughout their retirement, with a majority (55%) of respondents to our Workplace Pension Survey saying they would accept a lower return on investment in exchange for a guaranteed minimum income level. Even looking at the Guidance Guarantee, our research indicates that most people will be looking for it to provide an understanding of how to secure a regular income throughout retirement.

13. However, the annuities market has not been working well for consumers. Despite awareness of the right to shop around under the Open Market Option (OMO), savers often do not do so and end up selecting an annuity from their existing provider, often losing out on extra income in retirement. FCA research into the annuities market showed that around 150,000 savers could have got a better deal in 2013 had they not stayed with their existing provider, identifying consumer detriment in excess of £200 million – yet progress in reforming this market appears to have stalled. We look forward the completion of the FCA’s competition review of the annuities and wider retirement income market, which must ensure this important sector works well and delivers good value for all savers by April 2015.

Annual allowances

14. We welcome the pragmatic approach the Bill has taken towards mitigating the risks of widespread tax avoidance. In order for costs and burdens and schemes to be limited as much as possible, the implementation of the new annual allowances must be kept as simple as possible for schemes and for savers. It will therefore be important that HMRC both keeps reporting requirements simple, with schemes able to assume the £40,000 annual allowance is in place unless informed otherwise and only requires tax charges to be paid via the scheme when related to the £40,000 annual allowance, not the reduced allowances.

15. The application of the new annual allowance rules will be very complicated for those running hybrid pension schemes, and could affect some scheme members making legitimate contributions. We are skeptical that hybrid pension schemes will be abused for tax avoidance purposes. We believe it would be both fairer and simpler for a charge to be triggered on the higher defined benefit (DB) or defined contribution (DC) amount, with the more stringent rules outlined in the Bill only implemented if evidence emerges after April 2015 that new hybrid schemes are actually being set up for the purposes of tax avoidance.

16. We broadly support measures designed to bring more clarity to savers, particularly in an environment of greater freedom and choice. However, we are concerned that the requirement for savers to notify all of their schemes of having accessed their pension flexibly within 31 days is a heavy administrative burden to place on individual savers, many of whom lack awareness and confidence when it comes to managing their savings even now.

November 2014

Prepared 20th November 2014