Regulation 14ZB of the Taxation of Pensions Bill could unhinge Chancellor George Osborne’s Budget retirement revolution.
For those who have not yet read the Bill, regulation 14ZA says pension schemes must write to clients who access the Budget freedoms within 31 days telling them when they accessed the flexibilities and the effect this will have on their annual allowance.
The subsequent regulation, 14ZB, sets out the requirement for scheme members who have flexibly accessed their pension savings to notify the scheme administrators of any other schemes they are a member of that they have received a statement from their current administrator.
You can read the explanatory note here (paragraphs 181 and 182).
The theory behind this is straightforward – if someone chooses to access the pension freedoms, their annual tax-free allowance drops from £40,000 to £10,000. The new information requirements are therefore needed to ensure all the member’s schemes are aware that they have flexibly accessed their pension rights and, if necessary, can provide information about their savings based on the lower annual allowance.
I have spoken to several pension experts about how this will play out in practice. “Chaos”, “ridiculous”, “nightmare” and “unworkable” were some of the printable responses.
If policymakers think ordinary folk are both willing and able to contact all of their old pension schemes in order to take these freedoms, they are living in cloud cuckoo land. Let’s not forget this is the same Government that is pushing through automatic transfer plans because people tend to move jobs frequently and, as a result, build up savings through several schemes! Clearly nobody at the DWP told their Treasury colleagues.
This information overkill appears to have been sparked by growing Treasury fears about tax avoidance, an issue brilliantly exposed by Corporate Adviser editor John Greenwood in recent months.
But, as AJ Bell’s Gareth James points out, the Government’s own figures suggest just 2 per cent of over 55s pay more than £10,000 a year into a pension.
“All of 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,” he says.
MGM Advantage pensions technical director Andy Tully adds: “In reality a lot of people aren’t even aware of all the pensions they have.
“The alternative would be to create a declaration approach. So if someone was going to pay in more than £10,000, at that point in time the administrator could ask the customer ‘are you doing this with any other scheme?’.
“That looks like a more sensible way of doing it because you are targeting it at the people who are paying in more, rather than taking this broad brush approach.”
Those who pay for advice will, of course, be OK – and this sort of complexity will create another opportunity for advisers to add value to existing clients and potentially win new business.
But for the vast majority who don’t take advice, the Government’s decision to create a huge admin barrier to “freedom” will provoke anger and complaints.
The fear stalking the industry is that this anger will be directed at providers, rather than the Chancellor who is imposing a seemingly unworkable regime upon them.
Tom Selby is head of news at Money Marketing