Recommendation 4

HM Government · verbatim extract Not Addressed

The Pension Commencement Lump Sum (PCLS) forms part of tax policy and any changes are for the government to consider, rather than the regulators. The government’s overriding objective in providing generous tax relief for individuals to build up pension savings is to enable them to benefit from an income in retirement. 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. In principle, it is unlikely to be in the individual’s long term financial interests to take out their PCLS before they need to access their pension for the purposes of providing income for retirement. 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. 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 to maintain records of how much 6 Government and Financial Conduct Authority Responses to the Committee’s Fifth Report had been claimed by the member. Further, it would likely make it more complex for the member to understand and predict their tax position in future and risks making the system more difficult for members to navigate. The government remains concerned that individuals may see their retirement outcomes negatively impacted if they choose to access their PCLS early without taking informed decisions relating to the remainder of their pension pot. For the reasons outlined above the government wants to understand what issues exist in relation to how occupational pension scheme members access their pensions and will therefore be issuing a call for evidence in May 2022.