Andrew Roberts blog: Unrestricted drawdown – a catalyst for simplification?

With all the recent chatter about drawdown reform, no one spotted that the Government would advocate unrestricted access to pension pots for all. There was talk about simplifying the drawdown tables, linked Flexible Drawdown to personal wealth rather than pension income or having an enhanced drawdown for the pension wealthy. All of these ideas were blown away by the simplicity of the Government's announcement that people could just draw what they like as long as they pay income tax.So now that some of the dust has settled, what sort of detail could emerge to make this announcement a reality. {desktop}{/desktop}{mobile}{/mobile}First, let's look at some existing pension rules that make no sense if everyone can draw what they like. Removing them would create more simplicity and better understanding.As things currently stand, any growth in a drawdown pot is tested against the lifetime allowance on annuitisation or reaching age 75. This test is in addition to the normal lifetime allowance test on first vesting. This would be easily managed if you can draw the growth out less income tax, and so it makes no sense to expose these funds to a lifetime allowance charge. So let's scrap this exposure to a second lifetime allowance test.It also seems strange that a perhaps inadvertent overpayment of pension commencement lump sum by a scheme administrator would result in tax of 55%, being 40% paid by the recipient and 15% by the scheme administrator. I would hope that mechanisms are brought in simply to have this overpayment reported and subject to PAYE as for any pension income.Would it be an appropriate time to legislate what happens in cases of bankruptcy? The safety of pension savings from creditors has been called into question recently for those who have decided not to turn on their income. There are two sides to this argument: those who say that we shouldn't put at risk long term retirement savings, and those who think that pension wealth should be used to pay off their creditors. Perhaps the Government is more sympathetic to this latter group as, after all, they are happy for a pension fund to be used to buy a Lamborghini.Now let's turn to areas where some extra safeguards will be needed to protect tax receipts. These will add some complexity, but far better to get things right at the outset than introduce rules further down the line. {desktop}{/desktop}{mobile}{/mobile}The key risk to the Government's coffers (or the "taxpayer" as a collective) will be filtering of income through a pension to save NI and some income tax. This is because an employer could pay income as a pension contribution (saves NI) and the employee could then draw out that contribution as a 25% tax-free cash sum with the 75% taxed as income. Simplistically, a marginal 40% taxpayer could end up paying 30% income tax as well as the NI saving.There are rules to stop this already for those in Flexible Drawdown - you can't start flexible drawdown if you have made a contribution that year and any further contributions are subject to the Annual Allowance Charge (effectively, income tax). The rule makers should use this opportunity to get rid of the farcical PCLS recycling rules as well. {desktop}{/desktop}{mobile}{/mobile}Another risk to the taxpayer is that pension income is stripped out whilst temporarily resident in a lower tax country. I imagine that the rules that limit the ability to so this when in flexible drawdown will be expanded.Sadly, there will be come complexities that will need ironing out. One of these deals with valuing pensions already in payment prior to April 2006. When additional funds are vested, these previous pensions are valued against the lifetime allowance at 25 times their maximum annual drawdown rate at point of additional vesting. A suitable method will be needed and perhaps looking at the maximum on 5 April 2015 – though you will note that the maximum at that time will be 150% of the annuity rate. This unnatural process could perhaps be simplified if the Government – who have reconfirmed their view that the Annual Allowance is the method for restricting pension saving – scrap the Lifetime Allowance which will soon reduce to £1.25 million of pension savings or £62,500 of scheme pension income. {desktop}{/desktop}{mobile}{/mobile}Scrapping the lifetime allowance would have the benefit of removing the unfairness in the current system, that £62,500 of scheme pension with increases in payment and provision for a dependant's pension can easily be worth more £1.25 million.Andrew Roberts, Partner, Barnett Waddingham LLP@andrewddroberts

Andrew Roberts blog: Unrestricted drawdown – a catalyst for simplification?

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