There is much to be welcomed in the simplification of pensions, especially if it leads to savings, n...
There is much to be welcomed in the simplification of pensions, especially if it leads to savings, not only in scheme administration costs, but also presumably in the vast armies of the Revenue regulators that currently police schemes in Nottingham.
The following are our initial thoughts on areas where we believe there are problems in the proposals.
The £1.4m cap is discriminatory. At age 65 it would cost £1.55m to buy an equivalent pension for a single female, compared to a single male. The cost of pensions generally gets less the older one gets and therefore the cap will lead to less pensions for those retiring younger.
It is also possible to get markedly improved annuities for those who are regarded as impaired lives. It might be good advice for females to change sex, take up smoking and drinking and hang gliding as they approach retirement.
The cap will lead to real problems in making investment decisions. Consider a pension fund of £1.2m in December 1999. A reasonable decision might be to cease any further contributions as the fund was nearing the lifetime limit. That same fund could now be worth £800,000 in 2002, based on the average return from pension funds over the last three years. The planholder is three years closer to retirement, with less time to recover the loss in his pension and a limit of £200,000 a year in terms of contributions allowable.
If benefits are above the £1.4m lifetime limit, the proposals are that amounts above the limit will face a recovery charge of one-third of the excess. Any income drawn from the excess will then be taxable as income.
So effectively there is a tax charge of 33.3% plus 40% minus 73.3% for a higher rate taxpayer on amounts above the lifetime limit. This is a very penal rate that the paper states will roughly neutralise the tax relief given initially on contributions and then on the growth of the funds during investment.
This argument only works if the plan holder can be assured of equivalence in the tax relief compared to the tax charge. What could well happen is that relief is obtained at current rates of, say 40%, and at some time in the future, the charge is levied at a higher rate because a future Chancellor has increased tax.
We question the Government's numbers of people who they believe will be affected by these proposals. They say that probably fewer than 1,000 have their pension rights raised by £200,000 or more and that only around 5,000 people have pension pots in excess of £1.4m.
We have a large practice of Ssass and Sipps at A&B. We note the Revenue's proposals to consider restricting self-investment, whether that be loans or commercial property used by the employer to 5% of the fund.
To unwind these arrangements prematurely will cause significant financial problems for many thousands of small entrepreneurial-led businesses. In some cases they could even cause the failure of these businesses.
We will be making a detailed submission on this specific area but wonder whether the Government has considered how appropriate it is to create concern over the financial stability of such businesses, in what is already a febrile economic time for many employers?
We believe that small employers should be congratulated on risking their pensions to assist their businesses, rather than be criticised and curtail these opportunities.
Gareth Marr is managing director at Advisory & Brokerage Services
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