Taxation of Pensions Bill

Supplementary written evidence submitted by National Association of Pension Funds (TP 15)

April 2015 Pension Reforms: 100 Known Unknowns

This document summarises the questions and uncertainties that remain to be resolved (as at October 2014) in order for the full range of new pension freedoms to be made available to members of DC pension schemes and for the implementation of Better Workplace Pensions to take place. Some of these questions set out in this document have been partially answered by command papers, draft regulations, and legislation that is being considered by Parliament. However the questions cannot be considered to be fully answered until the legislation receives Royal Assent and regulations are made, as schemes and their service providers cannot make expensive system changes without that certainty. The unknowns fall into the following main categories:

Taxation of pensions   

Reduced Money Purchase Annual Allowance   

1. Have structures been put in place at HMRC to detect members who exceed their annual allowance?

2. How will the reduced allowance affect beneficiaries who inherit a member’s flexi-access fund and take drawdown from it, if at all? Will it vary according to whether or not the individual takes an income? Will this differ according to the member’s age at death?

Taxation of benefits on death   

3. Will dependants receiving income as a result of annuity guarantee periods be allowed to take these funds as lump sums once again? How will such lump sums be taxed?

4. Is the before/after age 75 distinction likely to remain?

5. Why is it OK for those taking drawdown from inherited funds to not be taxed (if death before 75) but beneficiaries who choose to buy an annuity to have to pay marginal rate of tax?

6. When will schemes have to move from the 45% tax rate to marginal rate on payments to beneficiaries?

Communication with members (disclosure) 

7. What changes will be made to annual statements? For example, will CETV estimates be required for DB?

8. Will schemes still have to do projections of fund value / income in retirement at all and particularly when member in drawdown?

9. What changes will be made to wake-up letter and other OMO-related communications requirements?

10. Will there continue to be different open market option procedures for contract-based and trust-based schemes?

11. How will trustees be required to signpost members regarding the availability of the guidance guarantee?

12. Which points in time will be relevant for trustee signposting, given that decisions for DC members about how they are likely to want to take their benefits will start affecting their investment strategies as they get into their 50s?

13. Will AVCs on DB and funded public sector schemes be covered by the same disclosure requirements as DC schemes?

14. How will schemes be required to notify members of:

o the requirement for advice on transfer from DB to DC?

o the reduction in the annual allowance where they have taken flexi-access funds?

o The tax and benefit implications of taking their pension as a lump sum?


15. Will any changes be made to members’ rights to transfer from a DC scheme, in order to facilitate freedom and choice?

16. Will there be any changes to the way that cash equivalent transfer values are required to be calculated as a result of the new legislation?

17. How will the right to transfer work where the scheme operates an underpin and the benefit may be either DC or DB on date of retirement, depending on how well the investments have performed.

18. How will the new rules on transfers work with the open market option regime?

19. Will there be different transfer regimes for contract-based and trust-based schemes?

20. Will the Government be coming up with more effective ways to police against scammers who are likely to try to take advantage of confusions caused by the new flexibilities?

21. Will trustees and managers be given additional responsibilities regarding policing the destination of transfers?

o If so, how does this fit with the right of the member to take a transfer?

o Will trustees and managers be given any additional tools to combat transfers to dubious destination schemes?

DB to DC Transfers 

22. Will there be a threshold below which advice is not required? (There was a reference to the £30K trivial lump sum threshold in the announcement as somehow relevant.)

23. Current requirements regarding the content of wake-up letters, etc in relation to the OMO are no longer appropriate and in fact may be misleading where members have an option to take a lump sum or transfer to some form of drawdown. What is being done with the OMO regime, which no longer appears to be fit for purpose?

24. What will trustees need to seek from members as proof that advice has been taken?

25. How will the advice requirement interact with trustees’ duties to assure themselves that the arrangement is not fraudulent, now that "liberation" is acceptable under the tax laws?

26. Under what circumstances will the statutory discharge now available to trustees when a statutory CETV is taken be available on transfers by right?

27. What actions by an employer make a transfer employer incentivised (so that the advice must be paid for by the employer)?

28. How, if at all, will the CETV calculation be changed given the new circumstances in which transfers may be requested?

29. Will trustees receive further guidance on how and whether to reduce CETVs in order to protect remaining members of an underfunded scheme?

30. Will advice be required where a benefit within a scheme is transformed from defined contribution to defined benefit?

31. Will there be any restrictions on partial crystallisation of DB benefits in lump sum form, for example, payment of the value of non-statutory inflation increases in lump sum form to the member as an UFPLS, so long as advice is taken?

32. What steps will be taken to prevent schemes styled as occupational DB schemes from evading the DB to DC advice regime?

DC to DC transfers 

33. Will there be any move to control charges to members from transferring and receiving schemes?

34. What sorts of measures will be in place to prevent schemes styled as occupational schemes from misrepresenting charges, investment strategies and other aspects of their offering to individuals who may transfer in order to take advantage of enhanced flexibilities offered?

New products / defaults 

35. Will schemes be allowed to automatically transfer members to another scheme offering a drawdown facility and, if so, how and under what conditions?

36. Will schemes be allowed to ‘promote’ their own or others drawdown solutions without wandering into advice? Will the Government facilitate schemes helping their members choose a drawdown scheme without independent advice?

37. How should schemes deal with members who simply cannot make a choice?

38. Will schemes still be able to default members into an annuity at age 75 if the scheme rules currently require it?

Flexi-access drawdown 

39. Will there be new regulations on suitability and disclosure for trust based schemes offering drawdown (and UFPLS) and, if so, what form will these take, what will they include and when will they be published?

40. Will there be any impediments to charging members who use flexible access, as opposed to spreading the admin costs across all members?

41. Will a charge cap or other restrictions be applied to FAD?

42. Will current rules regarding the timing of taking tax free lump sums remain?

43. Now that the "death tax" has been removed from crystallised pension arrangements held for members under age 75, what sorts of differential treatment will remain for funds such crystallised funds, as opposed to uncrystallised funds? Will the only difference be the availability of a tax free sum?

44. Will there be regulation around the conversion of a capped drawdown fund to a flexi-access drawdown fund?

45. Will it be possible to inadvertently convert a capped drawdown fund to a flexi-access drawdown fund?

Uncrystallised funds pension lump sums 

46. Will or should there be anything to prevent providers from simply cashing out small pots as uncrystallised pension lump sums where members are given notice of right to transfer instead?

47. Will FCA rules (and equivalent DWP regs) for drawdown also be applied to UFPLS? What disclosures will be required at point of withdrawal and on-going?

Lifetime Annuities 

48. Will there be a different regulatory regime around annuities that may reduce over a pensioner’s lifetime? If so, who will develop the regulatory regime, FCA, DWP, Treasury?

Guidance guarantee 

49. What brand will the guidance service operate under and how will schemes have to describe the guidance?

50. Will the guidance service be promoted by the government?

51. What form will the guidance take?

52. Who will be required or given responsibility for providing the guidance?

53. How will F2F guidance be delivered and how accessible will this be?

54. Who will be entitled to the guidance and at what point(s) in their lives?

55. What information will be included in the guidance?

56. What outcome is guidance designed to deliver?

57. Will schemes have to track whether members have sought guidance?

58. What signposting will be required of trustees?

59. What signposting will be required of providers of contract-based schemes?

60. How will the performance of guidance be measured?

61. What will the roles of FCA be in monitoring delivery of the guidance guarantee?

62. What steps will be taken to keep a level playing field regarding delivery of the guidance guarantee to members of contract-based and trust-based schemes?

63. Must/should administrators demand proof that guidance has been sought before paying or transferring benefits? If so, how does this fit with the member right to transfer?

64. Can schemes provide or arrange for alternative guidance in lieu of that provided by the Government? If so, will this be regulated in any way?

65. How soon can we expect to see progress towards "pension passports" for members seeking guidance?

o Will there be a central repository of information? Who will that be?

o What disclosure requirements will be expected of trustees and managers?

Freedom and Choice odds and ends 

Statutory override 

66. The current override would allow trustees or managers of a scheme to pay benefits in line with the new tax flexibilities at their discretion on a case by case basis without altering the scheme rules or recourse to the employer. Is it intended that this override (which is very unusual) will remain, or might the process for occupational schemes be managed under section 68 Pensions Act 1995, as is usually the case.

67. Is the statutory override applicable to scheme rules (including rules referencing protected rights) intended to protect spouse’s benefits?

68. Will the override be extended to allow schemes to adopt charging structures related to the new flexibilities?

69. Assuming the power remains as drafted, will TPR be giving any guidance on the circumstances in which trustees would be justified in using or failing to use this power?

Trivial commutation lump sums 

70. Currently, the TCLS is only available if all benefits across all schemes, including crystallised benefits, are less than £30K and all must be taken within one year. Now that TCLS will be available only in respect of DB benefits, will funds taken from or remaining in DC schemes continue to count towards the £30K limit?

71. Are any plans afoot (eg the pension passport) to make the pension benefits easier to detect?

Contracted out benefits 

72. Will the regulations pertaining to contracted out benefits be amended to allow the new flexibilities apply to guaranteed minimum pensions?


73. Under recent case law, pension benefits accessible to the member are now accessible to creditors as well. Will steps be taken to protect at least some of the pension savings of members over the age of 55 from creditors, now that the entire pot can be taken as a lump sum?

Pensions on divorce 

74. Many earmarking orders on divorce award the spouse a percentage of "the maximum lump sum available", based on the assumption that the maximum lump sum will come to 25% of the pension’s value. Now that the maximum lump sum can come to the value of the entire pension, is anything going to be done to prevent these awards from being enforced literally under the new regime?


75. How will the new flexibilities apply to schemes in PPF assessment?

76. Are steps being taken to ensure that lump sums are not taken by highly-paid employees immediately prior to assessment?


77. Will the rule that QROPS must in certain circumstances pay at least 70% of UK tax-relieved monies as income be retained?

Minimum pension age 

78. How and when will minimum pension age change?

Further change 

79. Will the next government make further changes to pension tax?

80. Will the next government limit the freedom & choice?

81. Is tax relief on pensions sustainable in F&C environment?

Better workplace pensions 


Charge cap 

82. To whom will the charge cap apply?

o All members, including deferreds?

o How would this be accomplished in contract-based schemes?

o Active members only?

o Post-April contributions only?

83. How is this consistent with the desire that deferred members be subject to the same charges as actives?

84. What charges will be counted towards the charge cap?

85. How will charges taken from contributions or as annual lump sum charges be limited?

86. Can the industry expect any help from the Government come April in communicating to members why their investments, or the direction of their contributions, has changed?

87. Will there be any regulations or guidance concerning the efforts of trustees and providers to communicate the change?

88. How and how often will it be calculated – and what happens when market volatility changes the fund on which the charge has been taken?

89. Will it be permissible to charge separately for transfers, outside of the charge cap?

90. How and when will schemes need to report compliance with the charge cap?

91. How will compliance be monitored?

92. Will trustees be entitled to take charges from the fund of a member who has been in the default fund to cover the cost of advice at member request?

93. Can a member who is enrolled in the default fund be charged separately for:

o flexi-access

o a transfer

o an uncrystallised funds pension lump sum

o when he or she chooses any of these options?

94. Are there any plans to provide waivers from the charge cap where there is a guaranteed return?

Minimum quality standards - governance 

95. What will trustee chairs have to include in their annual statements?

96. What transaction costs should be reported in annual statements when there is no agreed definition?

97. Will there be any requirement on fund managers to disclose transaction costs, and if so what form will that requirement take?

98. What deadlines will trustee chairs have to meet in publishing their reports?

99. What will the requirements for independence and term limits for members of master trust boards?

100. How should trustees assess value for money?

101. How will providers IGCs interact with employers and their own governance arrangements?

November 2014

Prepared 20th November 2014