Spence & Partners latest blog for Pension Funds Online –
This weekend’s newspapers have been littered with trailers and leaks relating to Wednesday’s budget.
With the onset of auto-enrolment for many medium and small employers, no one is expecting seismic changes to the pensions landscape. However, I would perhaps give Osborne one or two suggestions.
Firstly, a ‘do’: I would ask Osborne to consider giving ongoing occupational schemes greater flexibility around the payment of lump sum benefits to extinguish small liabilities for those aged 55 and over. This could easily be done by extending the rules on ‘winding-up lump sums’ to ongoing schemes. Crucially, this would allow members’ benefits under other pension schemes to be ignored.
There is a substantial cost for pension schemes (and insurers) to administer benefits and this is disproportionately large for members with very small pension entitlements. Therefore allowing members the choice to receive small benefits as a lump sum will be a ‘win-win’ situation. A ‘win’ for the member, who will undoubtedly prefer a lump sum to a very small annual income paid over 20 years or more. A ‘win’ for the scheme, as the cost of administering the benefit could eventually be a substantial proportion of the benefit itself. It would also allow employers to remove a proportion of risk from their defined benefit (DB) schemes.
I also believe small pots are very vulnerable to the clutches of pension liberation fraudsters. Allowing a legitimate route for members to access these funds would significantly reduce the risk of them falling in to the wrong hands.
Note that I would only wish these lump sums to be paid for those who are eligible to retire. Small pots for younger members should be allowed to grow. I have seen recent examples of an employer being advised on arrangements whereby small benefits are isolated or transferred into a single pension scheme, lump sums are paid to members and the scheme is then wound up. For me, this is not the right thing for members who are many years away from retirement. It will be interesting to see if (and how) HMRC react to such arrangements, which could be viewed as a circumvention of current regulations.
I also think the current lump sum limit of £18,000 should be substantially raised. A 65-year-old with an £18,000 fund would only secure an income of £14 per week assuming they took their tax free lump of £4,500 (25% of £18,000). While I think there has to be some cut off, perhaps a figure closer to £30,000 would be more appropriate (equivalent to, for example, a £7,500 lump sum and an income of £100 per month for a male aged 65).
And my ‘don’t’? Please, please don’t tinker with tax relief. The reductions in the lifetime allowance and the annual allowance over recent years have risked disconnecting the boardroom and the shop floor when it comes to pensions saving. If it’s not worth it for the boardroom, do you really think directors will continue to engage with providing better pensions for their staff? Auto-enrolment has had a promising start but it’s a delicate balance. Hitting high and mid-earners with the stick of reduced tax relief will do significant damage to the long-term hope of encouraging employers and employees to raise contributions above the auto-enrolment minimum. As with all tinkering, there is likely to be unintended consequences. As well as undermining confidence levels in the pensions system as a whole (the ‘why should I bother’ factor) if incentives are removed, tax relief reduction also penalises those with long service and those who have had career breaks and wish to make up savings shortfalls in later life.