CMS Cameron McKenna response to Treasury Consultation Paper: Simplifying the taxation of pensions

This response has been prepared following consultations and discussions with a number of our clients representing employers and trustees from a broad section of occupational pension schemes.

1. Lifetime limit

1.1

In general the move to a single lifetime limit is a welcome step towards simplification.

1.2

The effect of the proposed lifetime limit of £1.4 million will depend on exactly how it is to be calculated in the case of final salary schemes. Therefore further detail is required before we can comment on the suitability of this limit.

1.3

Whether £1.4 million is the appropriate level for the lifetime limit will depend, amongst other things, on the way in which it is indexed. For it to continue to be anything approaching a realistic figure in the future, in should increase in line with average earnings.

1.4

It is clear from client feedback that employees other than high paid executives will be affected by the lifetime limit. The question was raised by some clients, if only the very small number of employees estimated by the Government will be affected, why have the lifetime limit at all?

1.5

There will need to be overriding legislation to deal with the provisions in existing scheme documentation and contracts of employment which say that benefits are subject to or calculated by reference to overriding Revenue limits. Schemes should continue to be allowed to calculate benefits by reference to the existing Inland Revenue regime, even if the limits are no longer mandatory, to ensure that the costs of providing benefits does not escalate.

2. Annual limit

2.1

The general feeling amongst those clients we discussed this issue with was that the annual limit was unnecessary and that the single lifetime limit was the only limit required. The annual limit appears to add an unnecessary level of complexity to the proposed new regime.

2.2

Any annual limit would need to be adjusted to allow for increases in the value of benefits as a result of enhancements following things such as ill-health early retirements and redundancy.

3.Death benefits

3.1

Whilst the proposed increased flexibility in relation to death benefits is to be welcomed, some schemes believe that it would have little practical impact and they would not change the nature of the death benefits provided unless they were obliged to do so. The view was that providing scheme members with certainty about the level of death benefits they were entitled to receive was better than telling members there would be a single pot of money available for distribution on death.

4. Increasing earliest retirement date to age 55

4.1

This proposal appears to be entirely inconsistent with the emphasis in the Department of Work and Pensions Green Paper on flexible retirement.

4.2

The proposal seems likely to lead to increased reliance on state benefits by many. The general view expressed to us was that if an employer has a business need to make an employee redundant at age 50, they will do so whether a pension benefit can be paid to them or not. However, in the absence of an entitlement to an early retirement pension or being able to find another job, the employee may have no alternative but to rely on state benefits. There may also be an element of age discrimination here as it could indirectly encourage employers to target redundancies at those over age 55.

4.3

Practice suggests that those who retire at age 50 have considered the options available to them carefully and have allocated resources to ensure that they can retire at that age. We can see no reason for changing this position.

4.4

If this change is to be made, the general feeling is that there is no merit in phasing it in over a period of time – full implementation should be in 2010.

4.5

There would need to be overriding legislation to deal with promises in employment contracts and pension scheme documentation that employees can leave with a pension at age 50.

4.6

A specific issue which has been raised with us is that if exceptions are to be allowed for certain groups of employees (such as firemen and policemen), care will be needed to ensure that any such exception applies to these types of employees in whatever industry sector they work. So, for example, an exception for firemen should not just apply to local authority firemen but extend to those who work in airports and elsewhere.

5. Transitional provisions and treatment of existing benefits

5.1

Many senior executives will already have reached the lifetime limit or will do so in a fairly short period of time. This means that there is no further benefit for them in participating in an occupational pension scheme. One significant drawback with this is that it means that those who are making management decisions about pension benefits from the employer’s perspective have no personal interest in the scheme and are therefore likely to be less concerned about the benefits it provides. Clients we talked to already reported that occupational pension benefits were of increasingly less significance to senior executives when they were being recruited and they were looking for alternative benefits.

5.2

The proposed treatment of FURBS needs to be clarified as a matter of urgency. Benefit planning for high net worth individuals is not possible whilst this issue remains outstanding. In particular, will pre-A Day FURBS and UURBS count towards the lifetime limit and will legislation override promises which have been made in contracts of employment in relation to such benefits?

6. Self assessment regime

6.1

Difficulties are envisaged with this in practice. Where for example a member has GMPs which are revalued at 8% and inflation is only 3%, the member will presumably have to disclose an increase in value. Who will determine this and how?

7. Annuities

7.1

The general feeling is that the requirement to purchase annuities at age 75 is unnecessary.

7.2

To deal with Government concerns that people may end up relying too heavily on state benefits, perhaps it would be possible to require them to purchase an annuity of sufficient amount to ensure that they did not have to rely on means tested benefits but then give them freedom to determine how they wished to use the balance of pension fund.

For further information please contact Mark Atkinson at mark.atkinson@cms-cmck.com or on +44 (0)20 7367 2184.