AVCs will be able to pay out tax-free cash under Government proposals which aim to remove the differ...
AVCs will be able to pay out tax-free cash under Government proposals which aim to remove the differences between these, FSAVCs, stakeholder and personal pensions.
Alasdair Buchanan, communications director at Scottish Life, said the changes make AVCs and FSAVCs redundant and he sees little reason why they should continue to exist as a separate product.
Still, Stewart Ritchie, pensions director at Scottish Equitable, said the changes and addition of tax-free lump sums to AVCs actually leads him to be more bullish on the future of the product. As employers also often bear the costs of operating the AVC, this may also make the product much more cost efficient for employees than a comparable stakeholder or personal pension, he said. As a result of concurrent rules, introduced in 2001, allowing a member of an occupational scheme to also have a stakeholder pension, AVCs had already come under pricing pressure from the cheaper personal pensions.
As reported in Investment Week in August 2001, Watson Wyatt's annual AVC survey showed the reduction in charges from many of the larger AVC providers was both quick and sharp. For example, the with-profits median reduction in yield for a 10-year contract with a £25 per month contribution was 2.1% a year in 1998 and in mid-2001 it had fallen to 0.7% a year, according to Watson Wyatt.
Now, with the Government's proposals for a simplified tax regime, to be effective from April 2004, the tax differential between AVCs and FSAVCs and personal pensions will no longer be a consideration either.
The overhaul will sweep away many of the rules on pension contribution limits to be replaced by a single lifetime limit on the total amount of pension savings that can benefit from tax relief. The Government intends to set the control level for the value of an individual's pension fund at retirement at £1.4m.
It will be indexed to keep pace with inflation ' similar to the earnings cap at present. This will be complemented by a light touch compliance regime with an annual limit on the value of the increase in each person's pension rights that qualify for tax relief.
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