The Draft Taxation of Pensions Bill – Sackers’ response to consultation
HMRC is consulting on draft legislation – The Taxation of Pensions Bill – and other documents for the changes to the pensions tax rules announced at Budget 2014 that give individuals greater flexibility to access their pension savings.
In this response:
- General comments
- Ensuring a consistent approach with DWP legislation
- Scheme rules override
- Choice for schemes
- Uncrystallised funds pension lump sums
- Trivial commutation lump sums
- Removal of the open market option
- Protected pension ages
We welcome the opportunity to comment on the draft Bill.
As noted in our response to HM Treasury’s consultation, Freedom and choice in pensions, the Government’s proposals to broaden the options available to individuals at retirement are helpful, and may help promote engagement with pensions generally.
In the present consultation, there are a number of measures which are particularly welcome, such as the move to increase the trivial commutation lump sum death benefit limit in line with the general trivial commutation rule which changed in March 2014.
There are also, however, a number of inconsistencies between the policy to allow flexibility within DC schemes and proposals in the pipeline for DB schemes (on which we note that a separate consultation is to follow). One example is the proposed retention of the trivial commutation lump sum rule for DB schemes, with the need to aggregate a member’s benefits in all schemes (including DC) to test against the £30,000 limit. Is it intended that disparities between the rules for DB and DC schemes will be minimised with a view to reducing complexity?
We also note that the proposed new money purchase annual allowance rules are very complicated. Further guidance would be helpful here, including updates to HMRC’s pension savings annual allowance calculators.
As legal advisers to trustees and sponsors of many trust-based, workplace DC schemes, we focus our comments on the potential impact of the draft legislation for this type of arrangement.
HMRC will need to ensure that the provisions in the Taxation of Pensions Bill can be operated in line with existing DWP legislation, or that corresponding changes are made to ensure that schemes are not inadvertently impeded from operating the new flexibilities.
By way of example, will DC schemes that are contracted-out on a DB basis be able to pay benefits under the new flexible options, provided that those benefits are money purchase at the time in question (in other words, any reference scheme test underpin or GMP underpin has not bitten).
In addition, uncrystallised funds pension lump sums (and potentially drawdown) will need to be added to the list of lump sum payments in regulation 20 of the Occupational Pension Schemes (Contracting-out) Regulations 1996.
It will also be necessary to ensure that the new legislation works with the recent changes made by section 29 of the Pensions Act 2011, to reclassify money purchase benefits in the light of the decision of the Supreme Court in the Bridge trustees case.
Scheme rules override
New section 273B provides a permissive override of scheme rules, in connection with certain prescribed payments for money purchase arrangements, to enable trustees to make these payments if they wish, even if the scheme rules would otherwise prevent the payment being made.
We note that this wording is consistent with the equivalent provision in Finance Act 2011 (paragraph 109 to Schedule 16) relating to the introduction of flexible drawdown and other tax changes. However, in our view, s.273B(2) as drafted could be interpreted as introducing a power to pay benefits flexibly only where schemes have an existing rule which would prohibit such a payment. Given that the policy intention is to permit schemes to choose to take advantage of the new flexibilities, this paragraph could perhaps be more clearly and positively expressed. The introduction of such a power under could even potentially be made s.68 of the Pensions Act 1995. Such powers have been introduced effectively in connection with DWP legislative changes, and would meet the policy intention of allowing the modification of schemes to introduce the new flexibilities, where the scheme rules would otherwise prevent such changes.
In addition, the proposed override would put trustees in the driving seat by giving them the power to make flexible payments from their scheme. Having determined at the outset of a scheme what benefit structure they wish to offer, this would mean that employers could lose control over benefit options offered in the future and when (for example, the rules may provide for benefits to be taken only when an employee has left service with the employer, but s.273B would seem to allow trustees to override this). Giving trustees the power to change the nature of the benefits offered under the scheme could be a significant issue for the sponsors of trust-based DC schemes.
We note the statement in the draft guidance that “scheme trustees or managers will not have to make these payments if they choose not to do so”. As such, where certain options are unavailable, members will need to transfer to another DC arrangement that offers the flexibility they wish to use.
This is likely to be of particular interest to schemes which offer DC additional voluntary contributions (AVCs) within a DB scheme. Related to our comments on the scheme rules override, the sponsors of such schemes will be keen to understand the extent to which they will (or will not) be required to offer any of the new options, so that they can make appropriate decisions and determine what changes (if any) will be needed to their scheme’s benefit structure before 6 April 2015.
In the proposed definition of “uncrystallised funds pension lump sum” (UFLPS), it may be helpful to stipulate that the payment of a small pot lump sum does not constitute an UFPLS. This would clarify the fact that payment of a small pot lump does not trigger the restrictions associated with flexible access.
We note the intention to remove the right to take a trivial commutation lump sum (TCLS) from DC schemes, whilst retaining the right to trivial commutation in a DB scheme. As the latter can only operate where the TCLS extinguishes all rights to benefits, we assume that the TCLS could not be used on an arrangement basis to extinguish any DB benefit whilst retaining DC AVCs. Is it intended that individuals wishing to access their benefits in this way could be forced to use an UFPLS in order to commute AVCs before taking a TCLS in respect of the DB benefit?
We recognise that the removal of the open market option from the tax legislation has been proposed on the basis of the increased choice that will be on offer, the availability of the “guidance guarantee” and the other proposals designed to ensure that members receive value for money (including the new cap on charges in qualifying DC schemes). However, for DC schemes which retain lifetime annuities and do not adopt any of the new flexibilities within their benefit structure, we consider that scheme members should still be given the opportunity to select their annuity provider. This could be dealt with under the Pension Schemes Bill.
Certain pension scheme members have a normal minimum pension age which is lower than age 55, which is protected under paragraph 21 of Schedule 36 to the Finance Act 2004.
A protected pension age can be lost on a transfer if the transfer is not part of a block transfer that meets certain conditions. Whilst the draft Bill provides protection on the transfer of single member benefits, these are subject to conditions and would only be of assistance in very limited circumstances, for individuals in the retirement pipeline between March 2014 and April 2015.
We note the Government’s stated policy objective of allowing individuals to make their own decisions with their pension savings from age 55, and that the Government “is keen to ensure that individuals are not prevented from accessing their pension savings flexibly under the new system”. Against this backdrop, it would be helpful to understand whether it is in fact HMRC’s intention that current pension savers should be required to give up their protected pension age, on which they may have long based their savings strategy, in order to take advantage of the new flexibilities.
The same rationale applies also to protected lump sums under paragraph 31 of schedule 36 to the Finance Act 2004.