Advisers have question pensions minister Steve Webb’s attack on predictions of billions of pounds of lost tax revenue from the freedom and choice in pensions changes.
Speaking before the Pension Schemes Bill committee last Thursday, Webb said it was unlikely there would be significant loss through employers flushing remuneration for over 55s through pension rather than through salary, avoiding employer and employee NI and income tax in the process. He said the fact that the raised trivial commutation limit of £30,000 this year had created a similar opportunity that had not been taken up meant employers would be unlikely to take up the opportunity available next year.
Advisers and providers have pointed out that the relaxed trivial commutation rules are only available to over 60s and in much more limited circumstances.
Corporate Adviser editor John Greenwood had earlier told the committee he believed the total opportunity for NI and tax avoidance was in the region of £20bn if everyone over 55 made full use of it, and quoted research from the CA Summit where two thirds senior DC advisers present had said they thought at least 10 per cent of that figure would be lost.
Webb’s defence was that the interim proposals that already apply would already allow for this level of NI and tax avoidance.
Greenwood had said he believed avoidance was more likely in 2015/16 because that was when supposedly definitive rules were taking effect, meaning employers would not have to change their structures more than once. He also argued that from April 2015 more pension providers will have easy withdrawal facilities in place.
Advisers have voiced other reasons why they believe 2015/16 will be different to this year.
Webb said: “My question to John Greenwood was you can do this this year and we don’t see this happening. I am not saying nobody is doing it, but we don’t see this happening on a significant scale. The first £30,000 you can take as a pot this year. So why aren’t people doing it? Because there are lots of barriers.
“I am not saying it couldn’t happen. I am not saying it won’t happen. But we don’t think we will see it happen on the sort of scale that is being talked about here. Aviva head benefits policy John Lawson tweeted: “You can’t do triv comm until age 60 and your total pensions must be under £30K.”
Jelf Employee Benefits head of benefits policy Steve Herbert says: “The current interim measures are not as appealing for this new remuneration flexibility as the potential landscape from April 2015.
There are a number of reasons why the industry and or employers have not been actively promoting this in the current tax year.
“The proposals represent a huge change to the pensions landscape, yet the interim measures were introduced only a matter of days after the Chancellor’s Budget speech and with no warning at all. It’s fair to say that all parties were absorbing the impact of such huge and unexpected change before reacting.
“As the interim measures came into force, the DWP announced the response to the charge cap consultation. This announcement, which had been delayed by some months, required all stakeholders in the AE process to review schemes that had already been used for auto-enrolment and/or were about to be used to ensure that they were compliant with the new rules. This was, and is, a much more immediate issue for employers and the industry and therefore took priority over the FOP interim proposals.
“There are not many employers who would be interested in using greater flexibility for only one year – given the time and expense of rolling this out and communication these changes. However, this will probably change once the new legislation is fully in force post 2015.
“Similarly, neither employers or the industry will want to embrace such options until we are all certain sure that this is an acceptable practice, and understand the implications for savers. I think many of us still expect further changes here.
“Finally, and not least, the current proposals would involve triviality rules – whereas there is no such limitation post 2015.
“It’s worth recalling that the widespread use of Salary Sacrifice took some years to move from senior employees only to the wider workforce. Yet over time this is exactly what happened. It’s reasonable to assume that the same will happen here under the current proposals.”
Towers Watson senior consultant David Robbins says: “Steve Webb’s challenge was a fair one – of course there are tax avoidance opportunities this year, as Paul Lewis wrote shortly after the Budget and it’s likely that only a small proportion of the people who could exploit them are doing so.
“That said, it’s only over-60s who can take advantage of trivial commutation and small lump sums. So a large chunk of the population you were talking about are out-of-scope.
“These lump sums need to exhaust all entitlement from the scheme. Trivial commutation is once-only and small lump sums can be done a maximum of three times from personal pensions. So, assuming that the employer isn’t going to put your salary into a different occupational scheme each month, you can’t just put part of each month’s salary into a pension and then take it straight out again throughout 2014/15.
“And for trivial commutation, you need to check that total benefit value across all arrangements is less than £30,000.”
”That’s not quite the world of “pension bank accounts” for over-55s.
F&TRC director Ian McKenna says: ”If advisers don’t give employers advice on how to avoid this tax and NI they could find themselves on the wrong end of claims from ambulance chasers saying they should have. It will become a matter of good tax planning to advise people over 55 to be paid in a way that is most efficient for them. Advisers that don’t will leave themselves exposed.”