Pensions expert Steve Bee believes there will be four ways of protecting existing pension pots from new retrospective tax rules, set to come into force by April 2006.
Bee, head of pensions strategy at Scottish Life, says the most commonly applied option will be the default one of no protection whatsoever.
This is because a communications gap will ensure most occupational pension schemes and their members will not get the advice necessary in time to implement protective measures.
That leaves three other alternatives: primary or enhanced protection, or a combination of the two, Bee says.
To recap, primary protection ensures those with more than the £1.5m lifetime allowance under the new regime will not be penalised by an additional tax charge.
Enhanced protection means people can also protect against taxes impacting on future investment returns or salary increases with subsequent growth in their pension pots.
The combination option of both primary and enhanced protection comes about because the rules allow people to apply for both.
The reason for doing so is that if a person wants to give up ehanced protection at some point in future, the would fall back on primary protection, not drop back all the way to no protection, which would leave them possibly subject to tax demands on funds above the lifetime allowance limit.
Executing these transitional arrangements before, during and following A-Day will require copious amounts of advice, Bee warns.
While the new regime is supposed to apply equally to all types of schemes, the reality is the government seems to have worded its documents in such a way that final salary schemes will actually be treated differently from money purchase ones.
Meanwile, for many senior executives it may be that taking up enhanced protection means it becomes in their best interests to leave their company pension schemes in order to best protect the pot they have already built up.
However, this may lead to other problems such as the fact employees will argue strongly that since the government forced them to leave the schemes they should not have to give up the 20% of salary typically estimated to be the payroll cost of a good final salary scheme.
This will force companies to look for other ways to spend the 20% of payroll other than in a pension fund.
"This will be the gist of probably hundreds of thousands of conversations going on all over UK plc between companies and their most senior people before A-Day I should think," Bee says.
"But only if the people and employers concerned find out about it before then. For those that don’t a different type of conversation will take place I suppose at some point after A-Day when people find out their pensions are being taxed to bits and there’s nothing they can do about it at that late stage. If that hasn’t got “Ooh-err!” written all over it I don’t know what has."IFAonline
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