Radical tax changes planned but compulsion put off

The simplification of pensions tax law is the most radical change proposed in the government's long-awaited Green Paper¹ and the two other reports published with it. Eight existing tax regimes are to be replaced. Other changes to the security of pensions and retirement age are more modest, while the question of compulsory contributions has been put off and state pensions are left largely untouched.

Bold move on tax

The tax proposals are set out in the report of the tax simplification review². There will be one new tax regime. Individuals will be allowed to pay all of their earnings into a pension if they wish. There will be an annual limit of £200,000 on "inflows of value to an individual's pension fund". There will also be a lifetime limit of £1.4 million on the "amount of pension saving" that can attract tax relief - a figure based on the existing earnings cap for higher earners.

It is also proposed to allow full concurrency, with individuals able to belong to any combination of schemes they wish provided the contribution limit is not breached. The complicated monitoring of benefit limits will be scrapped.

Some added security

Several measures are proposed that aim to increase the security of pensions. Based on the findings of the quinquennial review³ of the Occupational Pensions Regulatory Authority (OPRA) published with the Green Paper, a new proactive, risk-based regulator is envisaged. It is not clear whether this will evolve out of OPRA or replace it.

More details are given in the Green Paper of the new scheme-specific funding requirement to replace the minimum funding requirement. This will require employers and trustees to agree a funding plan and set it out in a statement of funding principles.

In response to concerns about employers becoming insolvent and leaving underfunded pension schemes and members without their pensions, the Green Paper proposes treating such schemes as priority unsecured creditors.

Must work longer

In response to the demographic crisis affecting pensions, the government plans to allow employees to continue working for the same employer and at the same time begin drawing their pension. In addition, the amount by which the state pension is increased if payment is deferred is to be more generous.

The concept of a retirement age is to go, and employers will not be able to dismiss employees over the age of 65, unless for objectively justified reasons. The pension age for public service schemes is to be increased to 65 and early retirement from any scheme will not be allowed before age 55.

Encouragement to contribute

The government has decided not to compel individuals or employers to contribute to pensions. However, it plans to keep this under review and has set up a commission for this purpose.

The Green Paper picks up the Pickering review's proposal that employers should be able to make scheme membership compulsory. It also accepts the recommendation for immediate vesting of benefits. Employers would be able to transfer small residual pensions into a stakeholder arrangement.

Responses to the Green Paper are required by 28 March, while submissions on the tax proposals are not required until 11 April. Occupational Pensions will look at the proposals in detail next month.

¹"Simplicity, security and choice: working and saving for retirement", Cm 5677, and a summary, available by telephoning 08457 023474, free, and from the website of the Department for Work and Pensions (DWP) (www.dwp.gov.uk ).

²"Simplifying the taxation of pensions: increasing choice and flexibility for all", available by telephoning the Treasury public enquiry unit on 020 7270 4558, free, and from the Treasury and Inland Revenue websites (www.hm-treasury.gov.uk and www.ir.gov.uk ).

³"Report of the quinquennial review of the Occupational Pensions Regulatory Authority", available from the DWP website.