The chair of the parliamentary committee charged with scrutinising pensions policy has argued that the benefits of increased tax income is a driving factor behind the UK government’s move to create flexibility in defined contribution (DC) pensions.
Speaking at the industry conference, Pensions and Benefits UK, Labour MP Dame Anne Begg said she was sceptical whether the government had fully considered all its options before selecting its chosen route.
In March, during the annual Budget, Chancellor George Osborne announced reforms to the DC market that remove compulsory annuitisation for pots sized between £18,000 and £310,000.
The changes, announced by the Conservative and Liberal Democrat coalition, will allow DC savers full flexibility, including withdrawing pots as cash charged at the marginal tax rate.
It was seen as reaction to a failing annuities market, beset by falling annuity rates for consumers due to lack of awareness and competition.
However, the changes set to be implemented by April 2015, have been criticised over the scale of the reforms, the reasoning behind them and the timescale.
Begg, chair of the cross-party work and pensions select committee, told the conference: “I do wonder if [the government] fully exhausted all the options for improving the annuity market.”
“Some of this was done because [the government] sees an immediate tax advantage, and it has more to do with that.”
The increase in income is to be fuelled by savers withdrawing their pots as cash and paying associated tax charges.
However, the notion of government income increasing as a result of the reforms was contradicted by other speakers.
Con Keating, head of research at Brighton Rock, said while immediate advantaged would be seen, in the long-run it was not the case due to a fall in demand in Gilts from annuity providers.
“What happens with Gilts will actually offset the tax advantage, and will add to the deficit.
“Based on the work the Bank of England has done on the effect of pension scheme and annuity buying on the level of interest rates, three years on, expect a tax bill because of these changes rather than a benefit.”
Begg also berated the government over the timescales of the reforms.
“It does seem strange the announcement was made before the consultation was launched and it is yet to make the case that people can get a higher, or a more secure income, under a more flexible system,” she added.
“It is an incredible challenge for the industry because of the way the DC system works,” she added. “It is going to be tight.”
Concerns over the timescale for implementation were echoed by the National Association of Pension Funds, which, in its response to the government consultation, said scheme members were at risk due to the speed of change.
“It is difficult to recall a time when UK workplace pensions have had more to deal with,” said Joanne Segars, chief executive from the NAPF.
“Even with the best intentions, this can only jeopardise good outcomes for scheme members and schemes should be given time to put the changes from the Budget in place first. We recommend the Government reviews the timetable.”