Simplifying pensions

It is the view of Scottish Life that the complex UK pensions system could be simplified enormously if people were allowed to hold different forms of pensions concurrently. The idea of permitting full concurrency is a good one because it would allow people to make their own lifetime pension savings alongside those being made on their behalf by the state and, from time to time, by their employers.

It is in no-one's interest for individual pension products to be so fragile they break every time someone changes jobs. Today's pension investors find it almost impossible to differentiate between the plethora of individual pensions available to them. Full concurrency would mean these similar, but different, products could become the same thing, a truly portable individual pension suitable for a lifetime's investment.

The tax regime proposed by the Inland Revenue in its paper of 22 February 2000 stopped short of introducing full concurrency of pension holdings, and the consequent simplifications that would have brought, in favour of some form of 'partial concurrency'. The notion of 'partial concurrency' is not sensible and would itself introduce even more complications to the bewildering array of choices facing people trying to save for the future.

The very real problems that people face today are illustrated by the following diagram and accompanying notes. The second diagram and notes is our interpretation of the situation if the Revenue's proposals are adopted. We believe these point to an increase in complexity, not a decrease.

Around half the workforce are in benefit-limited pension arrangements.

The other half have contribution-limited arrangements available to them.

Each group has its own 'exclusive' legislation. 'Concurrency' is not allowed. It is not possible to be an active member of an occupational pension scheme (whether defined benefit (DB) or defined contribution (DC) and contribute to a personal pension or Retirement Annuity Policy (RAP) at the same time.

There are exceptions to this. Members of 'contracted-in' occupational pension schemes may also hold personal pensions (PPs) concurrently for rebates from Serps, but they may not use the PP for any other purpose. ('Contracted-in' means not contracted- out of Serps and/or, S2P soon.)

A member of a 'contracted-in' occupational scheme may also use an FSAVC for the same purpose but it is not advisable as the level of rebate from Serps is lower if paid to an FSAVC. Nevertheless, the legislation does allow for this inadvisable option.

People who have two sources of income may have a PP as well as membership of an occupational scheme and may contribute to both concurrently.

The only other exception is that any member of any occupational pension scheme may take out a PP to hold a transfer value from a previous period of occupational scheme membership, another personal pension, or a Retirement Annuity Contract, although the latter would almost certainly be inadvisable.

Anybody in the UK workforce, in fact, can take out a Personal Pension, it's just that they cannot all do the same things with them.

People in Defined Benefit DB pension schemes or DC pension schemes can increase their pensions by paying into AVCs or FSAVCs.

AVCs and FSAVCs are very much like personal pensions in that they are contribution-limited' but they differ in that they do not provide a tax-free cash sum at retirement.

The exception is that AVCs which commenced before 1987 do provide a tax-free cash sum at retirement. This includes tax-free cash in respect of increases in contributions made after 1987, as long as the plan was established before then.

Even though AVCs and FSAVCs may not provide tax-free cash on retirement, they do anyway because they increase the amount of tax-free cash the occupational scheme can provide; there is a complex formula which provides for this within the occupational pension scheme.

In the 'contribution-limited' regime there are in fact three different regimes.

RAP has different contribution limits to personal pensions (and AVCs and FSAVCs for that matter) and produce different benefits on retirement. They can produce more tax-free cash at retirement than a personal pension can, depending on what interest rates happen to be at the time. They can also produce less tax-free cash than a PP for the same reason. This should not be a problem because it is possible to switch from an RAP to a PP at any time. However, as it is not permissible to switch back again it is inadvisable to do so other than at the point of retirement when the actual level of interest rates is known. Personal pensions effected between July 1988 and July 1989 produce different benefits on retirement; the earlier schemes can provide substantially more tax-free cash than the later schemes; although this is not always the case.

The contribution limits applying to both forms of personal pensions are different to those applying to RAP and to those applying to AVCs and FSAVCs, which are different again. Groupings of Personal Pensions (GPPs) look like DC occupational schemes, but are not subject to the DB limits. They are comprised of individual PPs and can include both pre and post 1989 versions with their own different benefit limits.

The above is just an overview of the actual position and does not cover the three different regimes that apply to occupational pensions where the maximum benefits allowed depend on when a particular member joined a particular scheme. Broadly the three regimes cover those who joined schemes before 1987, those who joined between 1987 and 1989 and those who joined after 1989; with the overall benefit limits becoming progressively less generous.

It is our opinion that the current complexities are unnecessary and act against the best interests of those trying to save for their retirement.

The green paper of December 1998 proposed that a third exclusive regime should be created for Stakehold

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