Pension Green Paper and tax simplification

The Government has this afternoon published their long awaited Green Paper and proposals on tax simplification following the Pickering Review in the summer. Unfortunately much of the detail is left to further consultation papers.

The proposals, most of which are for consultation, include the following:

• state pension age will remain 65
• giving people who wish to defer claiming state pension a fair deal and allowing people to continue working whilst drawing their occupational pension, opening flexible routes into retirement
• ending compulsory retirement ages except where there is justification
• introducing a single, lifetime limit on the amount of tax-privileged pension saving - with a lifetime ceiling of around GBP 1.4 million and an annual limit of GBP 200,000; maximum tax free lump sum set at 25% of the value of matured pension savings
• raising the minimum age for drawing pension from 50 to 55 years of age by 2010
• on winding-up, increasing priority given to people approaching retirement age and basing the level of protection on the number of years the individual has contributed to the scheme, irrespective of age or as an alternative aim to achieve a fairer sharing of assets between those with larger and smaller pensions, probably adjusted to reflect length of time in the scheme
• introducing pension schemes as a new category of creditor on company insolvency
• establishing a central fund into which members could choose to pay the funds that they receive on wind-up. The fund could then - acting as a whole - negotiate the purchase of deferred annuities with providers. Alternatively an insurance scheme could be introduced
• requiring solvent employers winding up a scheme to meet one of the following costs (a) ensuring all scheme members can buy annuities to guarantee their full pension (which would usually be very costly for employers) or (b) ensuring full protection for pensioners and those nearing retirement (with younger workers receiving cash equivalent transfer values as now). The Government acknowledges that there are arguments for and against increasing the amount that employers are required to put into the pension fund if they choose to wind up the scheme and say they will be guided by the aim of not increasing the overall burden on employers providing pensions
• consideration of various options in relation to the DTI's earlier proposals on including rights under occupational pension schemes within the scope of TUPE
• extending coverage of combined state and occupational pension forecasts
• allowing employers to make membership compulsory
• introducing an independent pensions commission to report regularly to the Secretary of State for Work and Pensions
• rights in all schemes to vest immediately with the proviso that small amounts (say GBP 7000) can be transferred without consent if certain requirements are satisfied
• replacing the MFR with a requirement for employers to contribute in accordance with a statement of funding principles to be agreed between employer and trustees acting on actuarial advice with fines for companies who don't contribute in accordance with agreed rates. If the employer and trustees cannot agree funding principles, the trustees would have power to wind up or freeze the scheme
• changes to the existing contracting-out regime which amongst other things consider: the amendment of the reference scheme test; permitting the conversion of accrued benefits on an actuarially equivalent scheme wide basis into benefits under a reformed reference scheme test; removing the restrictions around the age at which contracted-out rights are payable and the removal of rules that prevent the payment of a lump sum from contracted-out rights and the abolition of COMBS
• amending section 67 Pensions Act to allow schemes to make changes providing the actuarial value of the change does not exceed say 5% of a member's total accrued rights - and requiring that where there is a reduction in the value of accrued rights, the rights foregone must be replaced by something of actuarially equivalent value.
• less prescription in relation to MNT requirements
• minor amendments to the IDR requirements, including allowing schemes to choose whether they have a 1 or 2 stage procedure
• Cash Equivalent Transfer Values to be calculated on a basis that is fair to all and simplifying existing legislation on transfers
• removal of some of the prescriptive requirements of the disclosure regulations
• simplification of pension sharing on divorce

A full copy of the Green Paper can be found at: www.dwp.gov.uk/consultations/consult/2002/pensions

and the paper on tax simplification is at:
www.inlandrevenue.gov.uk/consult_new/pensions_consult.pdf

For further information on this issue, please contact Mark Grant at [email protected] or on +44 20 7367 2325.