As this April marked the first anniversary of pension simplification Matthew Craig takes a look at how things have changed
The original aims of pension simplification were, well, simple. By simplifying the complex tax legislation governing different types of pension scheme, it was hoped to make pensions easier to operate and understand, boosting retirement saving.
A surprisingly radical set of proposals to do this was drafted by a team at HM Revenue & Customs (HMRC) in 2003. In essence, the rules for at least eight pension scheme regimes would be condensed into one. A new annual contribution limit and a lifetime allowance were created, set at £215,000 and £1.5m respectively for the first tax year.
But as A-Day in April 2006 approached, the prospects for a new dawn faded, as qualifications took hold. To some observers, it seemed that official acceptance of some tax leakage as the price of simplification, was being reversed. The fact that "the Grantham eight", the original HMRC simplification team, had by this time moved on lent weight to this view.
Now, a year on from A-Day, what is happening on the ground? On the positive side, the rules over contributions and tax-free cash have been welcomed, as has pension concurrency.
Winterthur Life pension strategy manager Mike Morrison comments: "Full concurrency allows you to be in an occupational pension scheme and use a personal pension or a self-invested personal pension (SIPP) to top up, which is positive." Bestinvest investment adviser Justin Modray says the new contribution rules are far simpler to understand, adding: "They are encouraging younger earners with high incomes to pay into pensions early on."
Certainly for those new to pensions, the new rules are fairly simple. As Hargreaves Lansdown head of pensions research Tom McPhail puts it: "For most people, most of the time, you can now do pretty much what you want with a pension." Andrew Tully, marketing technical manager at Standard Life comments: "The fact that people can pay into as many schemes as they want is a real winner."
Under the annual contribution limit SIPPs have boomed, with several SIPP specialists saying they have seen record volumes in the run-up to the end of the first tax year under the new rules. Hornbuckle Mitchell managing director Neil Marsh says: "We have seen huge inflows from people maximising their pension contributions before the tax year end. IFAs are getting the message to their clients that things have changed dramatically."
Marsh says Hornbuckle Mitchell did 260 new SIPPs in March, with around 90% having significant contributions. Of these, he estimated 10-20% were maximum contributions of £215,000, 30-40% were contributions of £50,000 to £100,000, with the rest somewhere in the middle.
The effect on investments
Some feel that A-Day has had little effect on what investments are held within a pension, but Marsh says that Hornbuckle Mitchell has seen growing interest in specialist property vehicles which have been allowed since A-Day.
"We have seen quite a bit of money going into a fund for a development in St Catherine's Dock in London and for another fund for residential property in Poland. As long as the funds meet the criteria of being a genuine, diverse, commercial vehicle, they are an allowable SIPP investment," Marsh comments.
Another A-Day innovation involving SIPPs which is expected to grow in the future is the use of SIPPs in the workplace, as it is now possible for employees' shares to be transferred 'in specie' into a pension.
Origen technical manager Bob Perkins says: "This is attractive for people who have share schemes with their employer. There is no capital gains tax payable on the transfer and tax relief is gained on the shares as a pension contribution."
Employee benefit consultants and employers see huge potential for this 'doubling up' of two different benefits. A number of major employers, such as France Telecom's Orange, are understood to be investigating ways to facilitate this for their staff.
JPMorgan INVEST head of education and marketing David Higgins says that merely providing a group SIPP is not sufficient here, as education, to back up a suitable administration and investment platform is essential.
"Employees need to understand the opportunity they have to significantly increase their pension wealth, by linking two separate benefits together," Higgins comments.
At the other extreme from contributions, taking money out of a pension is one area where it is harder to see the improvements made by A-Day. Initially, under the alternatively secured pension (ASP) rules, individuals not buying an annuity at age 75 could pass on their pension assets to other family members, creating the concept of the family SIPP, as it was dubbed. But heavy tax charges were announced last December to prevent this.
However, Morrison comments: "ASP doesn't appear to be as attractive at first instance as it did on A-Day, with an 82% tax charge now, but there is scope for it to be used as a valid financial planning tool." Norwich Union head of pensions Iain Oliver echoes this view: "I am really pleased that they didn't get rid of it (ASP) altogether."
Unfortunately, the same cannot be said for pension term assurance (PTA), which was introduced last April before being condemned in the pre-Budget report in December and finally killed off in March's Budget.
Modray calls this the biggest negative of A-Day. "Getting pensions tax relief on life cover was a big positive for a lot of people." Tully agrees, saying this was a very disappointing change: "If you can encourage more people to take out term assurance, I can only see positives in it."
Industry experts are particularly annoyed that, with both ASP and PTA, discussions took place to point out the implications of the changes, with officials apparently accepting them, before later performing U-turns.
The effect of retreat
The retreats demonstrate how the initial promise of simplification has not been realised. Ian Williams, a certified financial planner at Park Row Corporate and Private Clients, blames this on short-term thinking by officialdom.
"Some really good things came out of the original proposals from the consumer point of view, but the reality now is that it is a total disaster and it's going to get worse. The original proposals were designed in consultation of the industry. They (the simplification team) took a view on a number of issues. They wanted to keep it simple, but accepted that it works both ways.
"Since then, they moved on and the bureaucrats completely wrecked it by picking holes in everything. Now we have got something that is more complex than all the previous regimes put together."
Others say attempts to close loopholes, for example on recycling tax-free cash, have led to horrendously complicated rules. Perkins points out that HMRC is up to its twenty sixth or twenty seventh newsletter explaining simplification. "The reality of how it's working is giving rise to a lot of questions", he comments.
Oliver says one lesson from the whole exercise is that it is fruitless to try and out-think HMRC; "Particularly if you are going to brag to the media about it, as it will close down the loopholes. In that sense, the behaviour of the industry has probably made the regulations more complicated than they needed to be."
There is little doubt that simplification has not shrunk the pensions rule book. Tully points out that the number of pages of regulation and guidance has grown from around 1,350 to around 2,100.
Despite this, Morrison says there is not yet a single pension regime. "There are areas of potential arbitrage, as we still have occupational rules and personal pension rules and quite complicated differences between them in some circumstances."
For financial advisers, this is actually a bonus, as it has increased the need for specialised advice in areas such as taking benefits from a pension. But it highlights the failure of pension simplification to achieve its initial goals. What of the future? Marsh thinks the size of year-end SIPP contributions could force a re-think on this area, while others believe annuity regulations need to be addressed to encourage innovation by providers.
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