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Commentary : Pensions tax free lump sum set for 'extinction'

22nd Feb 2016

 

The suggestion that the current pension taxation regime should be changed to the form of a pensions ISA could have a disastrous effect on the entire Auto Enrolment project.  There are already concerns about the capacity of the industry to cope with setting up hundreds of thousands of new pension arrangements for small employers.  The last thing it needs is for the whole incentive basis on which members are being enrolled to be removed. 

Everyone knows that people need to be encouraged to save more for their retirement but it is equally clear that in order to persuade people to tie up their money for 20/30 years, they need some incentive to do so.  The current system provides such an incentive through the existence of a tax free element available when money is drawn. 

If a change is to be made then moving to a flat rate of relief would still mean that many schemes would need to change their systems, but at least it would be utilising an established process for paying over the tax relief. 

For an industry struggling with both Auto Enrolment and Pension Freedoms the last thing that is needed is a further change which would require the whole governance methodology, mountains of material and systems to be reviewed and rewritten.  It would also inevitably mean that once again the industry would have to layer another tax regime on top of the myriad it already has to administer from past pension changes.

 

Nigel Chambers commentary to 

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