Simplicity, Security and Choice: Working and Saving for Retirement. A combined 'Green Paper' has today been issued by the Treasury and the Inland Revenue with a view to making pensions more simple, encouraging you to save more and offering incentives for those who work on.
The proposed reforms were announced by Pensions Minister Andrew Smith and included objectives and proposals for:
The main content of the press release is detailed below but in a few lines we have unravelled the 'nitty gritty' for you in plain English is as follows:
1) Reducing the eight different tax regimes and rules to just one. For example, irrespective of what type of pension scheme you are in, there should be one rule for the maximum tax free cash lump sum - i.e. 25% of the pension fund value.
2) Higher rate tax relief is proposed to be abolished and having one uniform rate of tax relief on personal contributions that you make to private pensions and Stakeholder to top up your basic state pension. This means that on current figures all people will receive an additional 28p for every £1 invested rather than higher rate tax payers also being able to claim an additional 18% relief via tax code or self assessment. This saves the Government money and allows them to help use the savings elsewhere.
3) A simpler tax framework to encourage people to save e.g. all people should be allowed to pay up to £200,000 per year in to a pension (up to a maximum of £1.4m in your lifetime) so you can pay in what you want and when you want.
4) To introduce more easier to understand pension schemes, similar to the Stakeholder pension , where there is only one charge deducted - a low annual management charge maximum of just 1% pa.
5) So that you can work longer, you will be actively encouraged to defer taking your State Pension after 65 with a £20,000 "golden thank you" if you leave it until 70. (£30,000 for couples).
6) Forcing you to work longer? To increase the minimum allowed early retirement age in company pensions from age 50 to 55. This will save employers money and hopefully encourage them to keep company pension schemes rather than closing them.
7) To introduce money back annuities to encourage more people to save. At present if your pension is being paid to you and you die, if you have no spouses pension built into it, then it stops and the pension company keeps the money. Allowing some form of money back annuity will encourage more people to save.
8) To raise the retirement age on Government 'sponsored' pension schemes such as Public Service workers, Nurses and Teachers etc from 60 to 65. This will save the Government money.
9) Self employed will be allowed to pay more National Insurance to build up additional State Second Pension benefits (employees already do this).
10) Special rules regarding 'contracted out of SERPS/State Second Pension' benefits to be abolished. Again simplifying the rules (and your statements).
11) Research will be carried out to decide whether we should all be forced to save for retirement in private or company pensions (compulsory pension contributions). At present the Government estimate that we have a 'Savings Gap', the difference of what we should save to what we actually save by £27bn, as some 3 million of us do not save enough.
Previous reviews that have contributed to this paper are The Sandler Review and the Pickering Review as covered on these sites. The Government's Release Today the Government tackled pension reform head on as it published a radical strategy to help people plan their retirement with confidence, with a twin approach to encourage more saving and promote longer working lives. Wide-ranging proposals designed to boost choice in pensions, as well as incentives to encourage older workers to remain in employment, are proposed in the Green Paper published today.
Work and Pensions Secretary Andrew Smith said: "The aim of the Green Paper is to help people choose how they plan for retirement, how much they save and how long they keep working. Its proposals tackle complexity by introducing radical simplification, renew confidence by enhancing security and help people plan and save by boosting choice and information. "The pensions system in Britain has historically been a labyrinth of complexity. For most people pension planning is an incomprehensible maze. "At least 3 million people are not saving enough for their retirement.
"The Green Paper 'Simplicity, Security and Choice: Working and Saving for Retirement' also paves the way for the biggest shake-up of the pension tax system ever and a major drive to give individuals access to tailored information that is relevant to their lives. "We are determined to help more people carry on working until they are 65 and even beyond.
At the moment a wealth of talent and experience in the workplace is lost as people stop working too early. The Green Paper proposes to crack down on discrimination and sharpen incentives to help older people remain in work. "All the partners in the pensions partnership - Government, employers, employees and financial services - must rise to the challenge of strengthening the voluntarist approach. "I want to see this progress open to independent scrutiny so I am establishing an independent commission to monitor the progress of the UK voluntary approach and assess whether we need to consider the options for additional compulsion. "The Green Paper will encourage and help people to retire on an income that meets their expectations, as we live longer and healthier lives.
"The Green Paper published alongside "Simplifying the taxation of pensions - increasing choice and flexibility for all" works with the grain of UK traditions of partnership and builds on our reformed state system which is now: fair between the generations so we do not saddle today's younger people with big tax rises fair to the poorest by giving them most support providing everyone with a solid foundation on which to build through the Basic State Pension and State Second Pension.
Ruth Kelly, Financial Secretary to the Treasury, said: "Proposals for the radical simplification of the taxation of pensions will eradicate complexity by replacing eight different systems with just one. This will make it easier for people to plan for retirement and enable them to make more confident decisions. "The package of measures put forward by the Government today tackles the current problems by offering the prospect of a simplified pension system offering more choice alongside increased security and incentives to save.
"The Green Paper proposes major reform across a wide spectrum of issues including: Promoting Employment Amongst Older People
The State Pension age will remain 65. Raising this would not get to the core of the problem and actually penalise people on low incomes who would have no option but to continue working.
However the Government has proposed measures to give individuals more choice to extend their working lives, including legislating against age discrimination, ending compulsory retirement ages except where there is justification and raising the normal pension age in the public sector for all new entrants to 65. The Green Paper suggests we give people who wish to defer claiming their state pension a fair deal. So people who defer taking their State Pension for five years or longer could see a 50% increase in their weekly payment. It also considers whether pensioners could take a lump sum instead of the enhanced deferred pension.
It will also consult on proposals to allow people to continue working for the sponsoring employer whilst drawing their occupational pension, opening flexible routes into retirement. Ian McCartney, Pensions Minister, said: "This Government has already reformed the state structure to provide extra help for today's pensioners, to tackle pensioner poverty and to open up second pensions for millions of people. This framework strikes the right balance between providing support and offering incentives. "We are not tearing up the entire state system and starting again. The current system is affordable in the long term and workable. "People need to be able to plan with confidence for their retirement. This package of reforms is aimed squarely at making sure everyone has security in retirement.
"Other issues in the Green Paper include:Informed Choice for IndividualsThe Government believes that if people have the right information and clear choices they will plan for their retirement sensibly. Currently informed choice is frustrated by complexity. The Green Paper offers a simple framework to help people understand their options and to give individuals clear information tailored to their own circumstances so they can see how the choices they face relate back to their own retirement prospects.
A new pensions advice line and an improved web-based retirement planner will be set up. Proposals in the Green Paper include massively extended coverage of combined state and occupational pension forecasts which early research shows have the potential to encourage millions to save more.
A Simpler Tax Pensions Framework - The current eight separate pension tax regimes make pensions difficult to understand and imposes unnecessary administrative burdens on employers, individuals and pension providers. Proposals include introducing a single, lifetime limit on the amount of tax-privileged pension saving - with a lifetime ceiling of around £1.4 million and an annual limit of £200,000. Under new rules over 99% of the population will be able to save more in a pension - with tax incentives. Many people will be able to build up a bigger tax-free lump sum.
For the first time people will be able to decide how much they want to save and when. There will also be more scope to save in the form that best suits the individual.
Pensions and the Workplace - The proposals in the Green Paper will save employers between £150-£200 million a year in pensions administration and make it easier for employers to set up and run good pensions schemes. The Government will work with the FSA and financial services industry to intensify saving education, including workplace packs and promoting total benefit statements in the workplace to raise awareness of both employers' and employees' contributions.
The Green Paper also considers allowing schemes to make pension membership a condition of employment. It will encourage pensions information being added to pay slips and recruitment material. Employees must be consulted before pension schemes are changed, the Green Paper proposes. And an employer-led task force - including trade union membership - will be set up to identify and promote good practice.
Other reforms include reforming the Minimum Funding Requirement ,saving companies £80 million a year alone, and allowing trustees to invest more appropriately given the characteristics of their own particular membership. Sweeping simplification of the contracting out rules and immediate vesting for new employees will encourage pension saving. Pension legislation will be consolidated into a single Act.Protection - There is a balance to be struck. The Government is determined to ensure that slashing red tape is married with greater protection for consumers.
The Green Paper proposes a new proactive regulator to focus on protecting scheme members particularly where there is a high risk of fraud, bad governance or maladministration. It considers fairer sharing of assets when schemes close, with more priority for workers within 10 years of retirement or those with more years of contributions. There is also more protection for members when employers wind up schemes. Proposals also include exploring the viability of insurance and introducing compensation for the full amount in cases of fraud. Capping is proposed to prevent executives jumping ship before a scheme winds up.
The Green Paper also sets out options on how to extend the advantages of TUPE protection to private company transfers. Building Trust and Understanding in Financial Services Proposals include increasing access to saving by developing the Sandler Suite of stakeholder products.
Coupled with low cost advice which will ensure that more money goes straight into the pension pot. It also looks at reform of the annuities market by introducing value protected and limited period annuities. The regulation of equity release and home reversion plans to protect consumers will be explored to allow the markets to work effectively for people. Steps are also being taken to ensure that pension fund trustees have appropriate investment expertise.