PLANS for new pensions legislation may have been prompted by the Government’s desire to simplify the tax regime and have a unified system for all types of arrangements, irrespective of joining dates.
However, while the proposals may achieve the objective of replacing the plethora of tax regimes with just one, the indications are they do nothing to address the more serious problem of ensuring a decent pension for all in retirement.
For a start
, the Green Paper, published by the Department of Work and Pensions, and the Tax Paper, published by the Inland Revenue, have failed to encourage employers to stick with final salary schemes. Many are closing pension plans to new entrants and, in some cases, winding them up in favour of stakeholder arrangements.
The Government is also planning to cap all pension arrangements at a maximum of £1.4 million per individual. The IR will tax pension benefits at 33 per cent over that cap in the pension scheme and, again, when the pension is received at the individual’s personal tax rate. This could be financially punitive and appears unfair.
Also, although the cap of £1.4m may sound an enormous amount of money, it is likely to catch even middle management over the next 20 to 30 years, unless the cap increases in line with salaries.
Another factor is individuals will not be allowed to contribute more than £200,000 in any tax year towards their pension arrangement.
This could cause a problem for someone retiring early on the grounds of ill-health, where the employer has to pay more than that amount into the scheme in the final year to fund early retirement.
Any employee retiring in these circumstances could be landed with a large tax bill on the employer’s contribution.
The IR has also proposed the early retirement age of 50 be increased to 55, with no-one allowed to retire before 50, except for ill-health. This increase can cause problems for those who were sold personal pension plans on the basis they could retire at 50 with a tax-free lump sum, for example, to pay off their mortgage. They may now find they have to work until 55 before being able to do so.
As well as simplifying contracting-out rules, there are plans to change priority rules on pension schemes wound-up. Pensioners already in receipt of pension are currently top priority and receive benefits in full, should a scheme which is being wound-up be in deficit.
However, those who have left the scheme, but not yet reached normal retirement date, and active members, who are still accruing service, will often lose part of their benefits.
The Green Paper confirms the maximum tax-free lump sum at retirement is 25 per cent of the member’s total fund, not just their personal pension plan, as at present.
However, neither of the consultative documents do anything to address the problems surrounding the purchase of annuities which, considering longevity and low interest rates, effectively mean there is a need to build up a substantial pot in the money purchase plan to ensure a decent pension for retirement.
Lessons could be learnt from the Republic of Ireland which allows individuals access to their pension pots, as long as there is sufficient left to enable a subsistence pension to be paid. This would avoid individuals being forced to purchase annuities at no later than 75. An alternative would be for the Government to sell annuities, rather than insurance companies who want to profit from them.
While the Green and Tax Papers simplify certain aspects of pensions law, they neglect to address the more serious problem of ensuring a decent pension in retirement. Unless this is done, employers will continue to abandon final salary schemes and employees will be reluctant to save for retirement.
Any new legislation to stem this tide must address the need for tax incentives and the reinstatement of advance corporation tax relief on shares as a priority.
Gary Cullen is a pensions partner and head of the National Pensions Unit at commercial law firm, Maclay Murray & Spens
