June 2014

About Chartered Accountants Ireland

Chartered Accountants Ireland (The Institute) is a membership body representing 23,000 influential members throughout the globe. Our role is to educate, represent and support our members. Our members work in senior positions in practice and industry. We are committed to restoring confidence at every level of the economy. We work with governments and businesses to raise awareness of the importance of sound financial advice.

Chartered Accountants Ireland was established as the Institute of Chartered Accountants in Ireland by Royal Charter in 1888. Its activities and those of its members are governed by its Bye-Laws and by Rules relating to professional and ethical conduct. These provisions are contained in the Handbook which is available to all members.

Chartered Accountants Ireland is governed by a Council and it is responsible for determining policy and monitoring its implementation. Council is lead by the Officer Group and supported by the Management Team and staff. A number of committees with voluntary member involvement also play a key role.

About the Northern Ireland Tax Committee

The Northern Ireland Tax Committee is the Chartered Accountants Ireland committee responsible for advising Council on taxation issues in Northern Ireland. It interacts primarily with HM Revenue & Customs, Government and with other representative bodies. The committee makes annual submissions on relevant tax consultations and draft legislation.

Chartered Accountants Ireland
CA House
47-49 Pearse Street
Dublin 2

Private and confidential

Freedom and Choice in Pensions Consultation,
Pensions and Savings Team 1st Floor
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

9 June 2014

Dear Sir/Madam,

Freedom and choice in pensions

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation document published on 21 March 2014. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of these comments and to take part in any further consultations/initiatives in this area that there may be in the future.

We have considered each of the questions outlined and summarised on page 47 of the consultation document and deal with these in turn below.

1 Should a statutory override be put in place to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility?

We do not believe that a statutory override of this particular nature is required. This would negate the benefit of a regime designed to give individuals more choice over how to access their pension savings. In particular, the proposed changes may well encourage those with small pension pots to start contributing to them again, as opposed to saving in an ISA, for example.

A statutory override might protect against the so called ‘Lamborghini’ situation (where someone empties their pension pot at retirement age and buys a new car). However, as individuals approaching retirement will also have access to free impartial advice, this will mitigate the risk of such situations arising.

In Ireland, the Finance Act 1999 introduced new retirement options for those saving with certain schemes allowing eligible retirees either to cash in a portion of their accumulated retirement fund immediately or to maintain it in retirement via an Approved Retirement Fund (ARF). The purchase of a small annuity remained mandatory; a form of minimum statutory override.

This minimum override requires that if an individual fails to withdraw a minimum of 5% each year from their approved retirement fund (ARF) they are taxed on a deemed withdrawal of 5% of the fund on every 31st December. A 6% drawdown limit is set for funds greater than €2 million. If the income the retiree takes from their ARF in each year is lower than this deemed withdrawal, then income tax will still be payable on the amount of the deemed withdrawal. If the income taken equals or exceeds the deemed withdrawal then no further tax is payable in relation to that particular year.

Under the 1999 Irish provisions, many individuals have not drained their retirement funds, opting to maintain the ARF, subject to the minimum annual drawdown. The problem with any form of statutory override is that it adds to the complexity for pensioners and pension service providers. Freedom and choice will be undermined where pension scheme rules prevent individuals from taking advantage of the increased flexibility.

2 How could the government design the new system such that it enables innovation in the retirement income market?

As an overarching point we would stress the need to maintain a consistent tax regime for many years so that innovators can be confident that any innovative products bought to market have a reasonably certain “shelf life”. Consumers will also benefit from a period of stability and be more confident in their product purchase.

As noted in our conclusion it will also be important that there are no further reductions in either the annual allowance or lifetime limits. Constant changes to the level of tax allowable contributions and changing limitations on the amount of pension fund that might be accrued add degrees of complexity and uncertainty that mitigate against product innovation.

The Pensions Policy Institute paper “Tax relief for pension saving in the UK” contained some suggestions that are worthy of consideration in this area.

3 Do you agree that the age at which private pension wealth can be accessed should rise alongside the State Pension age?

We are in agreement that this would be appropriate. The pension system should be consistent as a whole. Clearly not to so would create a disconnect between government and private sector policies particularily as many over 50s are now looking at their income options following the end of their lifetime career.

It is equally important that the UK remains culturally in tune with the changing demographics of its population. The UK pension system should clearly delineate the time period when individuals should begin accumulating pension savings and periods when they should be spending these retirement savings.

4 Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief?

We agree that this should be the case for qualifying schemes, again for reasons of ensuring there is not a disconnect created between how different schemes are operated.

5 Should the minimum pension age be increased further, for example so that it is five years below State Pension age?

As mentioned earlier, many people in their late 50s are now looking at their income options following the end of their lifetime career. The flexibilities within the consultation proposals would allow for such individuals to use their pots as a form of bridging arrangements. Whilst the proposals do provide scope for such bridging for up to ten years (which is longer than would normally be found in occupational schemes), this does not necessarily mean that people using their pots as savings will exhaust them in that time period. People in their late fifties/early sixties are generally employable and have the option to return to the workplace. Bridging arrangements act as a form of security whilst such individuals consider their options. So an increase would not be desired for the aforementioned reasons.

6 Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should pension providers be required to outsource delivery of independent guidance to a trusted third party?

The consultation advises that the Government intends to allocate £20m over two years to help develop this free and impartial service. HM Treasury states that some 320,000 people retire with defined contribution pensions each year. If the cost of providing this guidance was only £150 per person this would equate to an additional cost to the industry of £48 million per year. It is likely therefore that an additional significant cost burden will arise.

The practicalities of how and where face-to-face guidance is provided could also lead to more expense. Overall we feel that £20m will be insufficient and this could lead to lower standards of advice in some cases. Members could ultimately end up paying for this free advice indirectly.

In practice, it is likely that employers will find themselves meeting the additional cost and this could result in some employers questioning whether they can afford more generous Defined Contribution levels given the increasing financial obligations towards such members which would not have been anticipated when they set up the arrangement.

Where the employer does pay, in those circumstances we would recommend that the cost of providing such advice over and above the level at which it is free is subject to tax relief for the employer.

The importance of continued regulation cannot be stressed enough. Whilst there can be no doubt that providers will be under intense scrutiny over the delivery of advice, it would not appropriate to expect identical advice from all providers as some providers offer provider-specific solutions and some do not. However the framework within advice is given should be the same.

There is a very fine balance to be struck between an under-regulated framework which could lead to unwanted bias and threats and over-regulation which would leave little incentive for providers to compete on the quality of advice and scope and quality of retirement options available.

7 Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust-based pension schemes?

As a general principle there should be no difference in requirement. Guidance should be consistent irrespective of scheme type.

8 What more can be done to ensure that guidance is available at key decision points during retirement?

We have no particular observations in this regard; this is primarily a public communications issue rather than a financial or fiscal issue.

9 Should the government continue to allow private sector defined benefit to defined contribution transfers and if so, in which circumstances?

The flexibility in how benefits are taken will only apply to Defined Contribution (“DC”) benefits. However, as both the Budget and the accompanying consultation note, an almost certain side effect will be an increased desire among some members of defined benefit schemes to transfer their benefits to a DC scheme to take advantage of the new flexibility.

We do not believe that the right to transfer should be removed. Clearly the incentive to transfer will be more tempting from 2015 and many scheme sponsors may want to de-risk by promoting transfers. However in many schemes trustees under their duty of care act by and large for members rather than scheme sponsors and these trustees provide the necessary checks and balances to ensure that members are aware of the benefits they give up by transferring.

The Pension Regulator should develop detailed guidance for trustees on what can and should be said to members requesting transfers. The Pensions Advisory Service and the Pensions Ombudsman provide further checks to protect member’s interests. On balance we believe there are sufficient checks and balances in the current system to ensure a voluntary code of good practice on transfers such that a blanket ban is not necessary.

10 How should the government assess the risks associated with allowing private sector defined benefit schemes to transfer to defined contribution under the proposed tax system?

We would suggest that the Government considers establishing an independent commission to look at this question.

Conclusion

We wish to outline our broad support for the changes proposed to the pension rules in lifetime as outlined in the consultation, subject to the observations outlined above. In many other countries, the government does not impose restrictions on how people access their pension savings at the point of retirement and savers are trusted to manage their own finances; this is recognised in the consultation document.

It is important not only to give individuals more choice over the application of their pension pot at retirement, but also to encourage pension savings. We would recommend no further reductions in the annual allowance limit or lifetime limits. Further reductions would serve only to discourage pension savings.

Given that the proposals in the consultation represent a significant change to the UK pensions landscape it is also now appropriate to consider whether the existing rules that apply to pensions on death remain suitable. In particular it will be important to ensure that the rules on death will also fit with the new “lifetime” regime, especially in relation to the desire to provide individuals with freedom and choice when they retire in how and when they access their pension savings.

The rules on death should not provide any driver or impact in any way on that choice given that everyone with defined contribution pension savings will now have the freedom to enter into drawdown rather than an annuity.

In 2011, a flat 55% tax charge was introduced for pension funds held at death in certain circumstances. Should this remain unchanged, we believe that not amending the flat rate to synchronise with the amended rules for pensions in lifetime would result in a disconnect with the desire to provide individuals with a greater level of choice in lifetime over how they access their pension savings. In short, this could encourage individuals to take all their cash upfront or drawdown the majority in the early years of retirement in order to benefit from a lower rate of income tax, as that drawdown would be taxed at the individual’s marginal rate of income tax as opposed to the much higher rate of 55% on death.

We would suggest the 55% is removed and the rate on death is amended to the marginal rate of income tax in the individual’s year of death with an option to partially carry-back some of the death benefit to the previous tax year.

We agree that maintaining the flat 55% rate will simply be too high in many cases given that everyone with defined contribution pension savings will now have the freedom to enter into drawdown rather than an annuity. We look forward to the proposed consultation on these particular rules which will review this in more depth but we stress that it will be important to ensure these particular rules are also in situ from next April.

Freedom of information

We note the scope of the Freedom of Information Act in regard to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website and will be available to all of our members and the general public.

Do not hesitate to contact Brian Keegan brian.keegan@charteredaccountants.ie or Leontia Doran leontia.doran@charteredaccountants.ie of this office should you require anything further.

Yours sincerely,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie