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Comments from ACCA
April 2003

We welcome the opportunity to comment on the above consultation paper and would like to point out that we have already made some comments in relation to the taxation of pensions in our representations to the Green Paper - Security, Simplicity and Choice. Our comments on the paper are set out below.

Chapter 4: The Government's Proposals For Simplification

1. There is little doubt that the tax regime for pensions is cumbersome, complex and a hindrance to the contributor as well as to the effective management and operation of pension plans.
   
   
2. We would welcome simplification of the tax regime and consider it essential that the reforms take account of the changed working practices in the UK. The current regime hinders mobility and is a cause of individuals, who change jobs frequently, who work on a contracts basis or have multiple employments, not being able to take full advantage of employer administered schemes.
   
   
3. The features outlined at 4.7 of a new scheme will not create a radically different benefits system than the current one while creating a greater degree of flexibility and is to be welcome.
   
   
4. We consider that the suggestion made at 4.10 of a life-time limit, based upon a value of the retirement fund of £1.4 million, is complex, unworkable without considerable effort and runs totally contrary to the sensible proposals made until this point. It follows that the £200,000 annual increment in funds "contribution" limit would also not be appropriate.
   
   
5. We also question the assumption that only some 5,000 individuals may be affected by the £1.4 million value of funds limit. Given market fluctuations and the possibility of a repeat of the technology stock "bubble" there could quite easily be a pensions contributions problem to significantly more individuals, many of whom may be on very ordinary incomes.
   
   
6. If there has to be a limit then this should be based upon contributions, not the ever changing value of the fund itself. Besides the problems of constantly changing valuations which will be encountered by operating a fund value system, it creates exactly the problem which the consultation paper claims it wishes to eradicate - pensions tax rules driving people's important decisions.
   
   
7. If the Government decided to go down this much more complex funding route the £1.4 million pension fund value will need to be considerably higher to accommodate the significant increase in longevity which is forecast over the next few years.
   
   
8. While we can understand to some extent the Government's concern's over the amount of value which may be locked in for some considerable time within a tax advantaged fund, hence its suggestion for a fund value based limit, it could achieve a similar result from an exchequer point of view by setting an appropriate contributions life-time limit.
   
   
9. The fund value basis for pensions has played its part in contributions holidays taken by businesses in the 1990s and created a part of the problem which we now see in the pensions industry. While private sector final salary schemes would still need to be aware of fund values, a block on continuing contributions in a given year would not be helpful to the long-term health of such scheme. But the real problem could occur in money purchase schemes where individuals may be blocked, by the proposed funding rules, from adequately funding their plans during their working lives. The stock market could decline, as at present, close to the time of their retirement and the fund value with which to purchase an annuity could be reduced significantly. Individuals would find themselves with pensions in retirement far below what they would consider adequate.
   
   
10. Adopting a contributions based limit will also reduce the overall compliance burden of a pensions regime. The example sited in 4.12 of an actuarial test will no longer be relevant nor will the need for a tax relief claw-back arise.
    
    
11. The sheer bureaucracy and compliance burden of a so called simplified pensions regime based upon fund value as set out in 4.13 to 4.23 will not be necessary or relevant. If the Government is serious about pensions simplification then a contributions driven regime is necessary.
    
    Incentives To Save
    
    
12. The tax incentives discussed at 4.25 exist in order that people provide for their old age and take the burden off the state for additional income to augment the low value state pension. The tax incentives are not in place for purely altruistic reasons and the pension when drawn is fully taxable.
    
    We consider the new "spin" which the Government wishes to give the tax has proved ineffective for stakeholder pensions. We are therefore sceptical of the value of such a rebranding but have no objection in principle.
    
    We wish however, to be clear that there will still be full relief given to higher rate tax payers and the so called rebranding idea is not a pre-cursor to the withdrawal or restriction of full marginal relief (although this appears to be the proposition in annex B at B45). 
    
    Assessment and Questions For Feedback
    
    
13. The proposals as they stand will result in swapping one set of compliance burdens for another without adequate simplification of the pensions environment. The only way to properly simplify the current UK pensions tax regime would be to drop any kind of contributions or fund value cap. The other alternative, which we have already stated at some length, would be to use a contributions based cap.
    
    It is very difficult to predict whether simplification of the tax rules in itself would encourage greater pensions savings, and we have doubts as to whether it would, purely because there are more complex behavioural issues which impact peoples propensity to save that purely tax. We consider it is no bad thing to make the pensions regime far more transparent.
    
    The fund value based approach is only a gesture towards simplification. We do not consider it will significantly reduce compliance costs. Moving to a contributions cap would be much more likely to reduce compliance.
    
    Chapter 5: Simplifying Pensions In Payment
    
    Retirement Lump Sums
    
    
14. We fully support the continuation of the tax free lump-sum regime. It is a vital inducement for individuals to make private pension arrangements. It also allows those entering retirement to do so with a clean sheet in respect of any debts they might have accumulated.
    
    
15. As a part of the greater flexibility which is to be promoted for the retirement age it should be linked to reform which allow the lump-sum payment to be taken while at work part-time or full-time for the same employer. The ambiguous and unnecessarily restrictive rules force individuals with valuable knowledge to retire from organisations much earlier than they might have done otherwise.
    
      Flexible Retirement And Minimum Benefit Age
    
    
16. We appreciate the concerns of the Government that people may retire too early, having built up too little pensions entitlement and then subsequently have to rely on the social security system to augment their income. We would however, urge greater caution than is expressed in the document before the retirement age for benefits is increased.
    
    
17. It may be a better approach to encourage voluntary later retirement by introducing much greater pension payment and withdrawal flexibility. One key area we have already mentioned is the ability to take the tax free lump sum and still continue to work. In allowing the earlier taking of the lump sum this will have a positive exchequer effect also.
    
    
18. While we encourage flexibility we do not recommend "innovations" such as average salary schemes which could lead to wholesale early retirement by better paid employees in an organisation. The Government itself, being a large provider of final salary based pensions, should fully understand the turmoil and discontent such a move would cause.
    
    
19. We do not agree with the proposal to raise all special category - such as sportspeople - retirement ages to 55. Many of the special groups rely on their pensions entitlement they build up from there very productive early years of work. For the same reason we would not support the extension of the retirement age of certain categories of public sector employees -such as the armed forces.
    
    Where the Government considers there is abuse of the early retirement entitlement, where it is allowed on ill-health grounds, then that needs to be addressed specifically. There should not be general penalisation of all individuals in that category as a means to blocking that abuse. 
    
    General Benefit Rules -Annuities
    
    
20. While we can support many of the features outlined for the new rules we consider it would be appropriate to withdraw the age 75 cap for when a fund must be invested in an annuity.
    
    
21. The split annuity proposals are welcome but without a removal of the age 75 cap they are less useful than they could be. We consider that, if the 75 age cap cannot be removed altogether, it should be raised.
    
    
    Chapter 6 Making It Happen
    
    
22. To ensure that the hundreds of pages of tax legislation, suggested at 6.10 are swept away, we would repeat that the new rules should not be based upon fund valuation.
    
    
23. We seek clarification of the point made at 6.17 and in the questions at the end of the chapter. Surely if the new rules were contained in the 2004 Finance Bill then "A-Day" would be 6 April 2005 and not, as stated, 2004.
    
    Advantages Of Reform
    
    
24. We consider that the advantages outlined at 6.21 are overstated. The fund based limits will cause a huge compliance burden, increased complexities in the administration of pension plans and will not create any significantly increased transparency to the individual planning for retirement.
    
    
    Annex B
    
    
25. We have already commented on many of the points raised in this annex earlier and would question the structure of the paper in revisiting these issues again. For this reason we have not answered all the points raised for a second time but responded selectively. 
    
    
    Transition
    
    
26. The general thrust of the proposals seems to be that as long as you are a public sector employee there will be very little change to pension rights but if an individual works in the private sector the already declining levels of provisions can go even further down. For this reason, while we accept that the notion of grandfathering will mean the 'brave new world' of pensions will be complicated we do not agree that there should be wholesale rejection of this idea.
    
    We would also question any reform proposal based on fund value. The Government must use a contributions basis. This means that many of the complexities of valuing funds for every pension will then not be necessary.
    
    
27. We agree with the general proposal at B19 which talks of not creating a rules based system which will lead to complexity, in relation to the tax free lump sum. If the rules specifically relating to when the lump-sum can be taken, as opposed to the actual limits themselves, are changed so that individuals can extract the sum and carry on working with no change to their employment circumstances then such an approach will work. If, however, the rules are only partly changed so that there may still be Inland Revenue challenge then we would be concerned, and the "non-rules based" approach will not work efficiently.
    
    
28. We have already said the only way to ensure that pension schemes choose to adopt the new rules is to create a simple straight forward system. This will not be the case if a funds based approach is adopted. There needs to be a contributions based approach.
    
    
    The Lifetime Limit
    
    
29. The sheer complexity and unfairness of using a fund based system is highlighted in this section of annex B. While the focus of the consultation is on how the tax claw-back will operate there is no consideration of the downside of a funding based system. Beside the valuation and compliance related issues, which will be onerous, there would be a great deal of uncertainty for the tax payer. Not only could the tax payer potentially suffer from the unexpected cost of a claw back it could also mean a taxpayer fails to make full use of their fund limit during their working life because they thought they had reached their fund limit. However the fund value may then drop significantly before the time of vesting and the taxpayer will have missed out on being able to fully utilise the lifetime limit.
    
    
    Delivering Tax Relief
    
    
30. We welcome the assurance that the present way in which tax relief is given will continue and will be available at the individual's highest marginal rate. 
    
    
    Pensions on divorce
    
    
31. The pensions splitting proposals seem unfair. Whether the final system which is introduced relies on a contributions cap, or a funding cap surely any amount transferred to an ex-spouse, as a part of the divorce settlement, should then count against that individual's life time limit and not the limit of the transferor spouse.
    

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