The government has indicated it will not make changes to tax policies to make it easier for savers to take out their pension commencement lump sum (PCLS) before accessing their pension for the purpose of funding retirement.
In its response to the Work and Pensions Committee's (WPC) second recommendation within the 25-strong package laid out in January, the government said decoupling the 25% tax free sump would likely encourage members to access it earlier than they might otherwise.
The WPC had recommended to the government that regulators carry out a scoping exercise to "establish the research and testing" which could be undertaken on decoupling the 25%.
However, the government said any changes to PCLS are not for The Pensions Regulator or the Financial Conduct Authority (FCA) to consider as they form part of tax policy.
"This tax relief cost the government £61bn in 2019/20. Decoupling the 25% tax-free lump sum may encourage members to access their lump sum earlier than they would do otherwise and without seeking advice on the best approach to ensuring that their pension provision is sufficient for their retirement."
The government added it was "unlikely to be in the individual's long-term financial interests to take out their PCLS" first.
"For this reason, the government does not believe that it is appropriate to make changes to tax policy to make it easier for individuals to do so. There are also potentially significant policy and practical issues with separating a member's PCLS from the taxed portion of their pension pot. It would require major changes to pension tax legislation. Such changes inevitably bring a level of complexity, even where it is possible to limit this to the period of transition to a new system and managing any ensuing tax avoidance risks," the response stated.
The government added: "Such complexity is unlikely to be welcomed by consumers or the industry. In addition, in order to ensure that the member has not taken more than 25% of their pension pot or their lifetime allowance, decoupling the tax-free amount would impose additional requirements on scheme administrators."
New plans for engagement
After the WPC called on the government to drop its plans for a ‘statement season' in its 22nd recommendation, the government confirmed last week said "more could be done" on boosting general awareness of pensions.
It acknowledged the joint Pensions and Lifetime Savings Association/Association of British Insurers pension awareness campaign, but added the current system is "sub-optimal for members".
The government's response stated: "We recognise the challenges of delivering a ‘statement season' [but] we will continue to look at ways that we can prompt people to engage with their pensions, including what role annual benefit statements can play."
It comes after a broadly negative industry response to the ‘statement season' including concerns raised by the Pensions Administration Standards Association over resource and cost and worries that it could, in practice, expose millions more savers to fraud.
Harmonisation on pathways
The response to the WPC's eighth recommendation - centred on investment pathways - confirms the Department for Work and Pensions (DWP) will launch a call for evidence on requirements for trust-based schemes.
While the WPC recommended that the formation of investment pathways for contract-based and trust-based schemes be similar, the government said it needed to collect more information before making a decision.
"At present that there is little information on the decumulation products providers offer in the trust-based marketplace. There is also little evidence of engagement with members about the level of support they would want from their pension provider," the government told the WPC. "Until we know more about what is already on offer and the expectations of occupational scheme members it would not be appropriate to simply introduce, into trust-based schemes, similar requirements to investment pathways."
The DWP call for evidence is expected this month which the government said will "inform whether similar or different policy interventions are necessary to support savers in occupational pension schemes".
In its ninth recommendation to the government, the WPC also raised concerns over the charge cap present for savers who default to a scheme through auto-enrolment. It called for a similar cap for non-advised savers choosing decumulation products through investment pathways.
In its own accompanying response to the WPC, the FCA said changes to the current framework are in the scope of its post-implementation review, which will start this year.
The regulator caveated that there will be "limits" on what can be meaningfully evaluated after 12 months due to the longer-term nature of pathways.
PAA overhaul
On the trust-based side of things, the WPC has also called on a "full review and overhaul" of the pensions advice allowance (PAA) as its 14th recommendation.
The PAA - introduced in 2017 - currently allows savers to take up to £500 from their pensions each year up to a maximum of £1,500 to pay for financial advice. Use of it exempts the saver from incurring tax penalties for early withdrawal.
The WPC suggested the government remove the annual limit on PAA, upgrade the overall PAA in line with annual inflation, and encourage the Money and Pensions Service (Maps) to signpost the PAA.
The committee also called for the government to explore triage options to avoid the use of PAA in casers where it would be of poor value to savers, for example those in defined benefit schemes or with very small pots.
In its response, the government said savers "should be trusted" to make their own choices, however.
"HM Treasury and the FCA continue work to monitor the take-up and effectiveness of the PAA in the context of wider work to address the outstanding policy challenges in the UK's financial advice market," the government stated. "Amending the level of PAA would depend on the changes that were being made."
Effectiveness of MOTs
The 23rd recommendation of the WPC's addressed by the government centres on the ‘mid-life MOT' proposal.
It comes after the DWP announced last March that schemes that help savers with later life planning as part of a government trial will receive a £400,000 funding boost.
The WPC has recommended the DWP now undertake research to develop the most effective format for the MOT, establish the most efficient delivery route for it, and maximise its take-up.
The government confirmed it was working with both Maps and the mid-life MOT board to test effective formats and delivery routes.
"Maps are looking to develop a financial mid-life MOT, with input from the department and the wider mid-life MOT board and looking at best practice and examples such as Aviva, who have already successfully developed and piloted a mid-life MOT," the government stated in response.
On the question of take-up, the government pointed to chancellor Rishi Sunak's package for older workers in last year's Budget.
"This new package will ensure older workers will receive better information and guidance on later life planning, helping them make informed choices and supporting them to plan their career and remain in work, it stated. "Measures will include trialling mid-life MOT activity."
