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Pensions tax reforms: a recipe for disaster?

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Readers of Tax Journal of many years standing will know that it takes a considerable amount of provocation to rouse me from my lethargy and write something for the journal these days. However, the announcements in the Summer Budget of further rounds of consultation on simplifying pensions tax relief, coupled with the pensions flexibilities in operation since 6 April 2015 with more to come in 2017, have stirred my hackles sufficiently to put pen to paper.


Readers may recall my article, ‘Comment: Pensions tax simplification’ (Tax Journal, 26 July 2013), in which I deplored the never ending additional and amending legislation which has severely complicated the tax pensions regime since 6 April 2006 when it was significantly simplified. Since I wrote that article, guess what? We have had last year’s Finance Act (FA 2014) with its changes amongst other things to flexible drawdown and individual protection, this year’s Finance Act (FA 2015) with its changes to dependants’ pensions and annuities, and the proposals in the latest Finance Bill (Finance (No. 2) Bill 2015) with yet another set of individual protection rules, all further complicating the so called simplified regime. Can the legislators not see what they are doing or have they at last woken up to the fact that the pensions tax regime is now nowhere near as simplified as was its originally stated aim, but a virtual behemoth of complication? I see just an inkling of realisation in the latest announcement that there is to be consultation on whether and how to undertake a wider reform of pensions tax relief.

The consultation, Strengthening the incentive to save: a consultation on pensions tax relief, sets out the principles which the government believes any reform would need to meet to be a viable alternative to the current system. These include simplicity and transparency, and ensuring people have adequate savings for retirement.

Well, we certainly had simplicity when the pensions tax regime was fundamentally changed in 2006. It has got overwhelmingly complicated again because of successive legislative measures since then.

It is all very well trying to make this simple once again, but there has to be a positive policy in future of no more amendments (if any politician would ever accept that!). In addition, on ensuring people have adequate savings for retirement, the flexible options available now and in future do not encourage this.

Flexible options

The extension of the flexible drawdown options for members of money purchase (defined contribution) pension schemes since April 2013 and the ability to nominate anybody instead of a dependant as a successor to receive death benefits have been very welcome, but why has the latter option not been offered to members of final salary (defined benefit) pension schemes?

However, what concerns me more are the proposals announced by the chancellor in his Autumn Statement 2014 and Summer Budget 2015 to allow pensioners to sell their annuities for cash from 6 April 2016, subsequently deferred until 6 April 2017.

There is widespread consultation on this at present. The chancellor said the proposals would give more than 5m people the chance to cash in their annuities. Annuitants would be able to sell their annuities for a cash lump sum, access a flexible drawdown fund or establish a flexible annuity. This may indeed be welcome to all those former Equitable Life annuitants (the writer included) who now have annuities with Prudential that are still decreasing and may never increase and, as the chancellor claims, the proposals together with the flexibilities already introduced would give much greater flexibility as to how people can take their benefits from age 55. They can access as much as they want, when they want.

I must confess I do not share the chancellor’s enthusiasm. The potential for considerable mis-selling of these new freedoms to access pension funds fills me with alarm. Has no-one learnt the lesson of 25 years ago with the misselling of personal pensions?

What confidence can anyone have in the Financial Conduct Authority to take action against future misselling when in the past 18 months it has prosecuted no one in relation to the on-going pensions liberation scam?

Furthermore, what is going to be the reaction of the insurance companies who hold the funds underlying all these annuities? It does not take a genius to work out that they are going to impose punitive charges on anyone realising their annuity.

There is also another big fly in the ointment. Why are these proposals not being made available to the members of final salary pension schemes?

Again, that is easily deduced by our non-genius. All those public sector unfunded pension schemes would have to stump up cash to fund the new flexibilities. However, beyond that possibility, is there not the likelihood that some brave soul in a public sector pension scheme would seek to challenge the unfairness of these flexibilities only being available to members of money purchase schemes thereby infringing the rights and freedoms of one person or class of persons, and seek redress through the EU Court of Justice or even the European Court of Human Rights?

I'm sorry Mr Osborne, but this is a recipe for disaster.

For the detailed proposals, see Comments are invited by 30 September 2015.