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The small pots issue: a consultation Published: 31 January 2023 Emailed: 1 February 2023
With the success of automatic enrolment comes a side effect that could cause issues further down the line. Many pension savers still move jobs frequently and leave behind a trail of small pension savings accounts, known as deferred small pots.
With pensions dashboards on the horizon, despite delays, awareness of these pots is due to grow. However, this still leaves the issue of what to do with them once savers are aware of them.
The Department for Work and Pensions (DWP) is looking for views on different solutions to this problem. The consultation proposes different methods of automatic consolidation, each with various pro and cons. Once a process for consolidating pots has been agreed there is the secondary issue of the pots that have already built up.
The DWP will be assessing the solutions against 5 main criteria:
1. Delivery of overall net benefits for members through improved value for money outcomes, achieving a meaningful impact on the number of existing, and flow of new, deferred pots. 2. Complements member engagement on their savings journey/retirement planning. 3. Supports a competitive, sustainable and more efficient workplace pensions market (trust and contract-based schemes).
4. Minimising complexity and administrative burdens for employers. 5. Commands confidence in the system for savers and taxpayers.
The CIPP welcome any comments or suggestions regarding this consultation. We are part of the Small Pots Cross- Industry Co-ordination Group mentioned within the document and have been involved in getting the proposals to this stage. If the consultation is relevant to you or your business, we encourage you to submit a response. However, you can email policy@cipp.org.uk if you have any comments that you would like us to take forward.
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The IFS proposes better tax treatment on pensions Published: 7 February 2023 Emailed: 8 February 2023
The Institute for Fiscal Studies (IFS) has published a blueprint for a better tax treatment of pensions. The report outlines the five main reforms proposed to the government.
The IFS expresses concerns about the competency of retirement incomes for private sector workers and the current system benefiting higher earners. The report suggests that the reforms projected are to create a fairer and more aligned framework and boost savings for those that need it the most (bottom 80% of earners). The proposals have also been a movement for a shift in behaviour and a bridge for more valuable pension pots for the generations to come.
What does the reform package consist of?
1. the 25% tax-free component - the report suggests that the tax-free lump sum should be capped so that it only applies to the first £400,000 of accumulated pensions wealth, at a minimum. This aims to provide a more equal subsidy to all private pensions, benefiting those with a low retirement income
IFS states:
‘‘ going further, we propose providing the equivalent of a capped 25% tax-free component for basic-rate taxpayers, but designed in a way that increases the after- tax value of everyone’s pension (up to the cap) by the same proportion – basic-rate, higher-rate and non-taxpayers alike. A 6.25% taxable top-up on all pension withdrawals would achieve this’’
2. the exempt-exempt-exempt (EEE) employee National Insurance Contributions (NICs) relief – the report declares this should be ended and replaced where all individual pension contributions receive up-front relief
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