Open Letter to Ed Balls MP, Economic Secretary to the Treasury
Ed Balls Esq MP
Economic Secretary to the Treasury
The House of Commons
WESTMINSTER
London
SW1A 0AA
23 October 2006
Our Ref DGS/tag
Dear Mr Balls
Alternatively Secured Pensions
I note that at the Committee stage of the Finance (No. 2) Bill 2006 you said, “This is a consultative and listening Government”. I also noted that you used the fact that because the industry had not made representations then it must be content with the proposals. I therefore write to make representation on the debate on Alternatively Secured Pensions (ASP).
Rowanmoor Pensions is the largest independent provider of small self-administered schemes in the UK administering over 4,600 schemes with over 10,000 individuals with significant savings in those pension schemes.
In December 2002 your Government released a consultative document, “Simplifying the Taxation of Pensions: increasing choice and flexibility for all”. In that document there was no proposal that post A-Day members of a pension scheme would be forced to annuitise their pension funds. The basis on which the consultation for pensions simplification progressed was therefore with the expectation that forced annuity purchase would not be a Government pension policy post A-Day.
In accordance with that assumption, the following December (2003) the Government issued its response to the Consultative Document in what was effectively a White Paper. This gave details of how people could continue to draw a pension from their fund without buying an annuity (ASP). The Finance Bill 2004 followed, in line with the White Paper. In the Committee stage the Government made it clear that the major motivation for ASP was to enable certain sects within the UK who have principled religious objection to annuitisation to avail themselves of the UK private pensions legislation. This was welcomed by the industry and seen as a caring and concerned move to make pensions available for all citizens regardless of religion. It was also made clear that the Government thought that most people would annuitise by the age of 75 because the operation of any Income Drawdown plan is costly and only really cost effective for those with large funds (at least £100,000). Our response to the rules on ASP was that the limitation of 70% of the Government Actuary’s Department’s rate for a 75 year old was too restrictive and would mean that many in ASP would have limited income whilst they still had a substantial pension fund.
It was a surprise to read that the Government is proposing to limit ASP to certain people with religious beliefs. I believe this is an unconstitutional and extremely dangerous route to follow bearing in mind the multi-cultural nature of the British people. I suspect some inaccurate reporting since I cannot believe a Minister of the British Government would make such a proposal.
As we were all aware ASP did give rise to the opportunity to reduce Inheritance Tax by limiting the pension drawn from the fund to nil or a very modest amount. This was recognised as a potential loophole created by the Government’s ASP proposal. It was successfully closed by the Finance Act 2006 by placing an Inheritance Tax charge on any fund remaining in ASP.
The only remaining issue now is the potential to delay paying tax to the Government by not a taking pension from ASP. Some reports suggest that it is the intention of the Government to withdraw ASP.
I believe this would be a very retrograde step and would request that you very seriously consider whether it is necessary to withdraw ASP for the following three reasons:
- It is easy to stop the taxation delay by simply setting a minimum level of income that must be taken from the ASP fund. I would suggest perhaps a 50% of the GAD rate leaving the maximum rate at 70%.
- ASP actually increases taxation revenue since an Inheritance Tax charge is payable when the member dies. Had that member bought an annuity then there would be no tax revenue on his death.
- Britain is in a pension crisis. The intention of Pensions Simplification was to provide a simple set of pension rules to encourage people to save. People will not save for their retirement if they mistrust the rules under which they are saving and fear they will change and disadvantage them. We are seeing huge discontent with the unnecessary changes made to allowable investments inside a pension scheme, a result of the Finance Act 2006. Forcing people to buy an annuity would create yet more distrust and is likely to deter more people from saving for their retirement. I accept that this largely affects those on higher incomes but would suggest that if the directors of the companies that employ the people of this country mistrust the Government’s pension policy, they will not invest in pensions. If they make no provision via pensions then they are going to be very unlikely to spend time and effort to ensure their staff save for their retirement. I believe it is vital that we have a set of rules that do not keep changing.
I trust that you will consider this representation.
I am copying this letter to Mr John Hutton, the Pensions Minister, and to the Opposition Spokesman. Due to the importance of this issue I am also planning to publish the letter on the Rowanmoor Pensions website and also to release it to the press.
Yours sincerely
David Seaton
Director
