Savers’ ability to access the Budget pension freedoms is at risk of being hampered by harsh new penalties and growing amounts of legislative small print.
New disclosure rules introduced to ensure the Government does not miss out on tax receipts have been branded “another bureaucratic exercise” by one technical pension specialist. Experts and politicians are also calling on the Government to show restraint in punishing individuals who break the rules – with fines potentially reaching thousands of pounds per person.
Labour shadow financial secretary to the Treasury Cathy Jamieson told Money Marketing: “The uncertainty surrounding these reporting requirements is just the latest indication that the Government’s approach to these pension reforms has been rushed.
“If people are going to be fined for failing to meet the reporting requirements, which in some cases could prove rather onerous, then they need to know that before the event.”
At the same time, pension providers are mired in confusion over how to deal with members of final salary schemes who want to transfer out and take advantage of the greater flexibility now available in defined contribution schemes.
Both the strict new administration burden for members and the reluctance of some major providers to accept transfers from DB schemes are further evidence that the Budget reforms may not live up to the public’s expectations.
Part of the problem is the overlap between different Government departments’ initiatives. The Budget reforms fall under the Treasury as part of the Taxation of Pensions Bill, while the Department for Work and Pensions is pushing through the Pension Schemes Bill, through which the guidance guarantee will be made into law.
The lack of oversight for all the pension reforms was apparent during a public committee evidence session on the Pension Schemes Bill last week. When asked by shadow pensions minister Gregg McClymont whether the new disclosure rules would “stand the test of time”, pensions minister Steve Webb dodged the question, saying they were a matter for the other Bill.
George Osborne’s Budget freedoms have been a public relations success story for the Conservatives so far. But if members either find they are effectively barred from the freedoms, or face unexpected fines, the Government may find support drifting away the wrong side of the May election.
The Government has found little support within the pensions industry for a new requirement for individual members to alert their pension providers when they access their pension flexibly.
Experts warn the system will confuse members, the level of fines are harsh and the technical issue it is attempting to solve does not affect the vast majority of savers.
The Taxation of Pensions Bill includes proposals for pension schemes and providers to alert members within 31 days of them accessing the Budget freedoms. Under the plans, members will be given a statement that tells them on what date they accessed their pension flexibly and that this will trigger special annual allowance rules.
As part of the reforms, members who take advantage of the more flexible pensions system will be subject to a reduced annual allowance of £10,000, down from £40,000. Taking income from a flexi-access drawdown fund, taking a uncrystallised funds pension lump sum, taking a standalone lump sum or breaking capped drawdown limits will all trigger the cut. Any contributions made above the annual allowance are subject to a tax charge.
In turn, members will be expected to pass on this information to all their other pension providers and schemes, also within 31 days. If they join a new scheme within the same year, they will need to notify that provider too.
AJ Bell technical resources manager Gareth James explains why providers need the information.
He says: “The reason for all this is so that, if an individual pays more than £10,000 to any money purchase scheme in a tax year at a later date, that money purchase scheme knows that it will have to issue a statement to that member about the level of their savings – similar to the statement that providers now have to provide to savers when they pay in more than £40,000 in a tax year.”
However, James is concerned this added administrative burden on members far outweighs the benefits it will bring. He says: “The issue with this is that the Government’s own analysis shows only 2 per cent of over 55s pay in over £10,000 a year. So all the information is being shared just in case the individual is one of the 2 per cent of over 55s who might benefit from a greater than £10,000 savings statement at a later date.”
MGM pensions technical director Andrew Tully agrees. “This requirement is overkill, potentially exposing many thousands of unaware people to financial penalties,” he says. “The measure needs to be targeted more at those people who may be affected.”
But the requirement itself isn’t the only new headache for savers to grapple with after April.
The Government is also proposing a penalty structure for those individuals who fall foul of this duty, potentially running into thousands of pounds per person.
Under the plans, if the information is not passed to all relevant providers within 31 days of the member receiving it, a penalty of up to £300 could be enforced by HMRC. If providers still have not been notified, the fine will increase by up to £60 a day “until the information is provided”.
A member who fails to comply for a further month after the initial 31 days elapses could be forced to pay over £2,000. If the information turns out to be incorrect and “negligently or fraudulently provided”, an extra £3,000 fine could be also be added.
An HMRC spokesperson confirmed the maximum penalty would only apply where the failure was “deliberate”.
Talbot & Muir head of technical support Claire Trott says: “The reporting isn’t necessarily going to stop people over-contributing, so all this emphasis on the member having to report to all the individual parties seems excessive.
“I don’t think it’s going to necessarily help anybody in any way, shape or form – it just seems to be another bureaucratic exercise. To bring in fines just seems harsh – £300 is not a huge amount, but £60 a day after that racks up quickly. What happens if you go on holiday for two weeks?”
Aegon regulatory strategy manager Kate Smith thinks members might be tempted to consolidate their pension pots to sidestep the hassle of contacting multiple providers.
But she warns that people who do this will lose the option of taking three pots of £10,000 or less without triggering a cut in their annual allowance, under small pots rules.
Experts say the Government should consider simpler solutions. Legal & General pensions strategy director Adrian Boulding says HMRC should step in to “mop up people who break the rules”, as they do with people who accidentally contribute to more than one Isa in a tax year.
He says: “There’s a clear need for a Revenue process so those customers who don’t understand the rules – and this is very complicated – have it corrected if they pay too much.”
MGM’s Tully suggests a “declaration approach”, where members planning to pay in £10,000 tell the administrator if they are contributing to another scheme.
DB transfer confusion
The new reporting requirements may be onerous, but many savers in defined benefit schemes could find their route to accessing the freedoms blocked by providers before they even get to that stage – despite the pensions minister saying it is not their job to “override the preferences of the individual”.
Pension providers are well aware of how regulations can be applied retrospectively when it comes to pension transfers. Compensation paid to people missold personal pensions in the late 1980s and early 1990s, for example, cost the industry billions.
Earlier this month, Money Marketing revealed how some providers – including James Hay and Fidelity – would only accept transfers from DB schemes where the member had received a positive recommendation to transfer from a regulated adviser. From April, trustees and providers have a duty to ensure members see an adviser before moving from DB to DC schemes.
However, pensions minister Steve Webb subsequently told Money Marketing providers should not be blocking members if they wanted to transfer.
He said: “We recognise that for many people, staying in DB is the right thing to do but the reason we haven’t banned it is because ultimately we want informed consumers to decide what’s best for them.
“Provided there has been genuine independent financial advice and it has been clearly explained to them what the consequences of their choices are, I don’t think personally it’s the job of the receiving scheme to override the preferences of the individual.”
Providers have called on the FCA to give assurances accepting transfers from these “insistent” customers won’t come back to bite them.
Fidelity Worldwide Investment retirement director Alan Higham says: “Providers remember the past pension transfer misselling rectification bill. It is a huge business risk to accept DB transfers without advice to do so. People who were advised not to but signed letters saying they wanted to do so anyway ended up being compensated.
“If the FCA gives a clearance to accept without liability then some may change their policy.”
Likewise, James Hay marketing director Chris Smeaton says providers and advisers need greater protection from policymakers.
He says: “We are reviewing our process at the moment but that does not mean we will necessarily change our current position. We cannot ignore the fact that past industry experience points to caveat emptor simply not applying. No amount of warnings are likely to deter an individual desperate for short-term cash from pursuing a course of action which has a long-term negative impact, which they later regret and for which they then seek redress.
“We would very much welcome Steve Webb’s views on what measures could be put in place to protect advisers and providers from that depressingly predictable scenario.”
An FCA spokeswoman told Money Marketing accepting DB transfers was not a decision for the regulator. When pressed they would not give assurances providers could act without fear of future reprisal.
The spokeswoman says: “Where an individual insists on going ahead with a DB to DC transfer, even when the advice is against it, then it is up to the receiving provider as to whether to accept the transfer.
“Ultimately that is a decision for the receiving provider, not for the FCA.”
The fines proposed for those not disclosing that they have accessed their pensions scheme flexibly to all their pension schemes seem to me to be harsh and difficult to police.
Although the initial fine could be seen as not significant, it could still be hard to find for a good number of pension savers, especially if they start to rack up the daily additional fine. Those hit hardest by these fines would be those least likely to be making the excess contributions they are designed to prevent.
As ever, even with these enhanced requirements, it will not stop people contributing over their annual allowance if they want to, which the annual allowance charge is designed to mitigate anyway.
Members of multiple schemes are most at risk of doing it accidentally, though providers will still be unaware of contributions being made to other schemes, so will not question contributions below £10,000.
Once you add the complexity for those in a final salary scheme, many members will not be in a position, without good quality advice, to understand all the implications of just taking their lump sum from the scheme they set up a long time ago.
All in all this measure seems unnecessary and unable to achieve what it was designed for, which is to prevent people from ignoring the Money Purchase Annual Allowance rules and not declaring their excess contributions to HMRC.
Claire Trott is head of technical support at Talbot and Muir
Jamie Smith-Thompson, managing director, Portal Financial
This news will be a shock to consumers and could cause a number of problems, including making people too scared to withdraw money from their fund. The consequences of getting it wrong seem disproportionately large, and people may feel punished for having gaps in their knowledge. The proposals put the consumers in the firing line of heavy-handed legislation, and the forms people will need to fill in will undoubtedly be so complex they cause confusion, putting an extra burden on anyone simply wanting to use the new pension freedoms. The potential fines are huge, so this is a scenario where no one can afford not to seek professional advice.
Tristan Brodbeck, director, Tristan Brodbeck Financial Planning
These latest announcements simply illustrate what a dog’s dinner the Government and regulators have made of the pensions market. In trying to solve one problem, they create another. People have been turned off pensions in droves. It’s no wonder the Government’s projecting that by 2030, one in three homes in the UK will be owned by buy-to-let landlords.
If interest rates were set at proper levels then annuities would offer a decent return, pensions would be safer from political interference and the housing bubble would be able to deflate.