Following a consultation last December regarding early access to pension savings (see Aries article), the Government published its response on 19 April.

Whilst committed to improving flexibility over savings, the Government has decided to park this particular, potentially radical, incentive. The reasons given are: limited evidence early access would have a positive effect on overall pension contribution levels , or provide significant help to individuals facing financial hardship; and the need to first clear the decks of current extensive pension reforms (automatic enrolment).

The Government had consulted on four options:

• A loan model allowing individuals to borrow from their pension fund, similar to US 401(k) schemes, requiring repayment of the loan with interest at relatively lower rates than other sources. Research from the Pensions Policy Institute suggests a modest potential increase in participation rates of 0 to 6%. Retirement funds would actually decrease if contributions ceased during the loan period.
• A permanent withdrawal model, allowing access to funds without repayment obligations - possibly in limited circumstances, such as in cases of hardship. This would be similar to New Zealand's KiwiSaver. This option would create new administrative burdens and is somewhat at odds with the UK's EET principle (exempt contributions, exempt investment growth, taxed benefits).
• Early access to the 25% tax-free lump sum currently available from age 55, extinguishing the right of a pension commencement lump sum. This would seem the easiest option to understand and administer - assuming it isn't based on a projected fund level nor can be exercised more than once - but it's hard to imagine the Government not issuing a slew of new recycling regs.
• A 'feeder-fund' model, creating a more flexible savings product linking liquid savings products, such as ISAs, and pension savings together into a single account. An automatic trigger point could place savings above a certain amount into a ring-fenced pension pot. These could be easier for individuals to understand, although funds from an ISA can already be placed into pension saving.

Only the last one has been deemed worthy of some further consideration. While responses to the call for evidence on these early access proposals were generally (and predictably) negative, there was support for this feeder fund model. The Government says it will engage with industry to further develop innovative workplace savings models that will encourage saving for both medium term needs and for additional retirement income.

More promisingly, the Government has undertaken explore reform to trivial commutation rules to improve flexibility for those with very small levels of savings in personal pension schemes. The consultation paper had asked for evidence on issues that may be affecting individuals with smaller pension pots (see Aries article), primarily focusing on the trivial commutation rules and possible barriers to transfers facing those with smaller fund values. There was a strong (again, predictable) response from the industry on this problem.

Since May 2009, occupational pension schemes have been allowed to trivially commute small funds of up to £2,000 in certain circumstances (see Aries article). The refusal of the previous Government to extend this flexibility to personal pension providers is thought to have arisen from the rather fanciful notion that it carried a significant risk of tax abuse. There is some hope now that the industry will be able to convince the present Government of a safe way to align PP and OPS rules.

Treasury close overseas loophole
The start of the tax year was greeted with the announcement that HM Treasury will change legislation to prevent tax avoidance through the interaction of pension relief and the provisions of certain double taxation arrangements. A potential loophole for UK residents transferring pensions overseas had been spotted in time to prevent advantage being taken. It is thought that the stimulus was a new double taxation agreement with Hong Kong.

A statement from HMRC says that a new clause in Finance (No. 3) Bill will be brought forward to provide that a payment of a pension may be tax in the UK where:

• the payment arises in the other territory;
• it is received by an individual resident of the United Kingdom;
• the pension savings in respect of which the pension or other similar remuneration is paid have been transferred to a pension scheme in the other territory; and
• the main purpose or one of the main purposes of any person concerned with the transfer of pension savings in respect of which the payment is made was to take advantage of the double taxation arrangement in respect of that payment by means of that transfer.