The ability to take tax-free cash should be prohibited in personal accounts, as this would cut the cost of tax relief and help subsidise the scheme, claims First Actuarial.
In its response to the pensions white paper ‘Personal accounts: a new way to save’, which closes tomorrow, the actuarial consultancy argues allowing individuals to take a lump sum from their personal account runs counter to the stated aim of providing income in retirement.
The company claims refusing to allow tax-free lump sums, which since A-day can be up to 25% of the fund, would help cut the cost to the Treasury of granting tax relief on the new scheme and, as a result, suggests this saving could then be used to subsidise the running of the scheme.
In addition, the firm claims by restricting personal accounts simply to the provision of retirement income, this could encourage employers to offer alternative pension arrangements which would include the extra incentive of the tax-free cash option.
Alan Smith, director of First Actuarial, points out personal accounts aim to increase the retirement income of the millions of people who reach retirement with little or no pension provision other than the Basic State Pension (BSP).
He argues allowing a lump sum to be taken from an account in the new regime “does nothing” towards providing members with this much needed retirement income.
In addition, Smith warns for it to be a success personal accounts will require a strong framework of advice and information, particularly to help people “through the complexities of means-tested benefits to assess whether they should opt in or out of personal accounts”.
He adds: “Without advice there is significant scope for individuals to make the wrong decision. But there also needs to be some focus on encouraging individuals to make higher levels of pension contribution together with regular assessments of whether they are on track to meet their retirement aspirations.”
Smith suggests instead of focusing on a low headline charge, the government should ensure personal accounts meet the needs of the target market by “providing suitable advice and guidance and then, as a secondary step, consider how this can be delivered at the lowest charge possible.”
The company’s response also suggests employers should be exempt from auto-enrolling staff into personal accounts if the employer already offers contributions of at least 3% of earnings into a stakeholder or group personal pension (GPP) plan.
The suggestion follows similar representations from organisations such as the National Association of Pension Funds (NAPF), which is proposing the implementation of a good pension "quality mark".
It argues the decision to join a stakeholder or GPP would be clear cut as even employees who cannot afford to contribute would benefit from an employer contribution and so build up some level of benefit.
However, Smith warns when the new system is introduced, if an employer offering this kind of scheme still has to auto-enrol staff into a personal account there would be “a great temptation to drop the stakeholder which could result in many employees receiving no pension contribution at all from their employer”.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
Clients to be compensated by end of 2018
Rolled out to 25 schemes next month
Mean gender pay gap now 16.64%
26 years in financial services
Some 150 claims still to process