Skandia’s five points, sent to the Treasury as part of the company’s pre-Budget submission, are intended to address the key issues facing pension savings in the UK – namely regulatory complexity and the challenges faced by an individual when moving their pension savings to provide retirement income.
The company’s five changes for a clearer pension market are:
1. Increase Workplace Financial Advice
In 2004 the Government introduced an exemption from income tax where pensions financial advice was made available to all employees. The value of that advice was restricted to £150.
The Government should double that amount and the advice should not have to be restricted to pensions, it should encompass all forms of retirement savings. To limit the extra costs, and to further increase the chances of employers engaging with the process, they should be given the option to restrict the provision of advice to new employees, those approaching retirement and those approaching a significant life event.
2. Abolition of Lifetime Allowance for Basic Rate tax payers
The declarations that have to be completed to ensure that a Lifetime Allowance charge does not apply when someone accesses their pension savings only serve to add to the confusion for an individual converting their pension savings into retirement income.
If an individual can confirm that they have never paid higher rate income tax, the Lifetime Allowance should not apply to them. It is extremely unlikely that a person who has not paid higher rate income tax would have pension savings anywhere near the Lifetime allowance.
3. Increase small pots commutation limits
The Government should increase the small pots limit to £10,000, the point at which the annuity market becomes competitive. The number of small personal pension pots being commuted should be unrestricted.
4. Change to calculation of Capped Drawdown limits
The current GAD tables used to limit Capped Drawdown reflect annuity calculations. These calculations are not relevant to an investment portfolio used for Income Drawdown. The tables result in fluctuations in maximum income calculations that reflect movements in gilt yields rather than the performance of the underlying investment portfolio.
The Government should consult on replacing the relevant annuity concept from April 2016 with factors that are static and relate to the underlying performance of the investment portfolio. Such an approach would simplify Capped Drawdown, maintain the Government’s view that those taking capped income should not deplete their pension assets too quickly, and remove anomalies the current system produces.
5. Abolition of Benefit Crystallisation Event (BCE) test at age 75
All other BCE tests relate to a pension event. Therefore it is easy to engage with pension scheme members to get the necessary declarations and information to ensure benefits provided are within the Lifetime Allowance. Reaching age 75 is not an ‘event’ in the minds of a pension scheme member. Many therefore ignore requests for information which leads to unnecessary post age 75 administration on behalf of schemes and HMRC. This will become greater as the population ages and more people have pension savings from which an annuity has not been bought at age 75.
The Government should remove the age 75 BCE test and apply the BCE test to events as and when they occur after age 75. This would simplify the pension system and make it more relevant to an ageing population.
Speaking ahead of the Budget announcement, Adrian Walker, retirement planning manager at Skandia, said: “We believe that one of the biggest obstacles to engagement with retirement saving is the complexity of the market. This complexity dissuades individuals from making key decisions that will affect their future.
“While suggesting further changes to the regime may at first appear counter-productive, we believe that the measures we suggested in our pre-Budget submission will make the move into retirement that much easier and less confusing, without causing a material adverse impact on the Exchequer.
“These measures will reduce complexity, go some way to increasing financial capability and lead more people to make informed decisions about their retirement savings.”