The pensions taxation consultation paper was hardly unexpected but its contents were. The depth and ...
The pensions taxation consultation paper was hardly unexpected but its contents were. The depth and breadth of its proposals leave intermediaries with plenty of scope to give advice but there are an awful lot of pension fundamentals that are going to have to be relearned. In essence, if the contents of the paper remain unchanged through the legislative process, the UK will have only two basic pension products, defined contribution or defined benefit. Within defined contribution plans will be the variants of personal pensions from the top end, such as Sipps and drawdown, down to stakeholder. Very little will separate the different personal pension vehicles as all will be treated identically in terms of contributions limits. While the Government has been making radical changes to taxation, it has decided not to put an end to the 25% tax free lump sum on retirement
The only difference with stakeholder may be the investment management range it will offer under the 1% charging cap and the need for a governance structure. In effect the Government has promised to simplify the pensions regime for product providers so that they can bring their costs down. Parallel schemes are also now allowed and the link between earnings and contributions has been broken
Through this the Government appears to be heading back to the roots of pensions in the UK, according to some industry experts. While the paper has been warmly received by the industry, IFAs will have to be aware of its implications
One of the more radical proposed changes is the abolition of carry forward/carry back provisions. This has been an effective way for many people to make up their pension contributions if they have fluctuating incomes. Typically this facility is used by the higher earning self-employed and, according to the Government's theory, there is so few people that this applies to, there is really no need to keep the facility
For those in the low to medium income brackets who receive a windfall, either in the form of an inheritance or cash gift and are earnings, the loss of carry forward/carry back will also be a problem
There also appears to be several holes in the regulation of the new structure. The allowance of parallel schemes does not set a limit as to how many schemes one can have nor does it state who exactly will police them. If it falls to the product providers then any concession they have received through a simpler tax and administration process they will lose through the cost of having to check how much money each customer already has in pensions. This could also partially become the adviser's responsibility
The other complication surrounds occupational money purchase schemes. The Government has left the door open for employers and trustees to decide if it is in their members best interests to switch to the new regime or remain in its status. Inevitably this will complicate matters as a switch will benefit some but not all and could lead to employers feeling they need to operate two schemes in an effort not to disadvantage anyone
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