We refer to the Technical Consultative Document on the Draft Taxation of Pension Bill, published on 21st August 2014 and are pleased to provide our brief response.
It will be understood that, because of the short time frame available for responses, we have not been able to consult with our members. Accordingly, we have only two substantive comments to make.
It will be understood that we remain wholly supportive and, indeed, enthusiastic of these changes which, thankfully, liberalise the rules for individuals accessing their accumulated pension savings. We are pleased that there appear to be no significant qualifications to the proposals as announced at the Budget 2014. We appreciate, however, that this is an area where the tax legislation is unavoidably complex in the light of the regular previous revisions to pensions rules, particularly in recent years.
We have an overarching concern that many individuals, even those (such as our members) who are generally more financially aware, may not be in a position to assess the respective merits of Uncrystallised Fund Pension Lump Sums (‘UFPLS’) and Flexi-access Drawdown Funds (‘FaDF’). Indeed, the variables are complex and include expected life expectancy, the likelihood of future employment/self-employment opportunities, the scope for making additional pension contributions and, of course, the future rates of income taxation and tax bands applicable. We recognise that these uncertainties cannot wholly be eliminated but we consider there is further scope before the Taxation of Pensions Bill is enacted to simplify the factors involved.
Our Responses to the Draft Taxation of Pensions Bill
We consider that the legislation concerning the two options from 5th April 2015 (i.e. “flexi-access drawdown” and “uncrystallised funds pension lump sums”) for taking benefits from money purchase schemes from age 55 are broadly satisfactory but each includes an unnecessary penalty. These are:-
It is disappointing that the ConDoc legislation proposals for the so-called recycling of tax free lump sums are so complex and onerous. Our engagement with our members highlights to us that both employment and self-employment are increasingly flexible and it is becoming (and, indeed, has become) more common for individuals to return to full/part time work after an initial retirement. We note that the ConDoc proposed legislation includes provisions that, as soon as funds are accessed as UFPLSs, the limit for contributions to the individual’s pension fund fall from £40,000 to £10,000. This is unduly restrictive and ought to be amended on a basis that the £40,000 contribution limit is reinstated after no drawdown has occurred for say, two, fiscal years. In our opinion, this would be more than sufficient to prevent unacceptable, pre-planned recycling to occur.
We are also disappointed that undrawn funds in FaDFs, whilst permitting the tax free lump sum (limited by way of the relevant fixed cap and to 25% of funds invested) will, unlike UFPLSs, continue to be subjected to the confiscatory 55% tax rate upon the individual’s death. We consider that there is no justification for such a tax rate in these circumstances. It is seldom, of course, possible for an individual to assess their life expectancy and there should not be a higher tax liability for an individual who prudently decides to draw their pension funds over a longer period. We consider that the maximum rate applicable ought to be set at the higher rate of income tax i.e. 40% (noting that an extremely small number of individuals would pay tax at the additional rate after retirement). Our preference would be that the rate is set at, say, 30% to ‘match’ the availability of the personal allowance and basic rate tax band if the individual had survived for more years.