John Moret discusses how the coalition government may affect the SIPP market
When I agreed to draft this article I had no idea that we would witness such extraordinary post-electoral developments culminating in the first coalition government and cabinet for 65 years. One immediate benefit has been the publication of a "coalition agreement" which describes policy issues where agreement has been reached.
In the context of SIPPs I would suggest that there are two important issues that are covered in the initial agreement - as follows:
• To end the rules requiring compulsory annuitisation at age 75
• Increases in capital gains tax rates for non-business assets
There are other pensions related proposals in the agreement notably:
• A promise to review public sector pensions
• The restoration of the earnings link for the basic state pension with the "triple guarantee"
• The intention to hold a review to set the date at which state pension age will rise to 66
These latter three points are clearly significant but they have a much broader impact and raise an important question - as does the proposal to increase the income tax personal allowance to £10,000 with a substantial initial increase in April 2011. The question is how these and other changes will be funded. One suggestion which was in the Lib Dem manifesto was to abolish higher rate pensions tax relief. The latest agreement is silent on this topic but there have been suggestions that the government will allow the current provisions, introduced in last year's Finance Act and updated this year, to go ahead.
That would be very unfortunate given the complexity of the provisions contained in the Finance Act 2009. I hope that instead we might see a much more simplified approach involving a significant reduction in either the annual or lifetime allowance. Such a change would also act as a statement of intent regarding future pensions simplification.
There were other pensions issues mentioned in pre-election manifestos which may get a further airing in due course notably the future of Nest and interestingly allowing early access to pension funds - perhaps up to the level of the accumulated tax free cash. Given that the Conservatives have also talked positively about such a change it must be on the cards that this will resurface at some point.
However, coming back to the first two changes above, I am delighted to finally see the end of the rules requiring compulsory annuitisation at age 75. Having been heavily involved in the design and introduction of income drawdown in 1995 I could never understand the obsessive way in which the previous government resisted change to the age 75 requirement while life expectancy was increasing at such a dramatic rate. There is still a lot of work to be done in designing an alternative framework for the future which is fair and provides investors with greater freedom along with an appropriate level of security.
The government are also going to have to address the tax treatment of death benefits as the current regime is mindblowingly complex and inequitable. There are vastly different tax implications depending on age and whether benefits have started to be taken.
They could opt for a two-part solution which first requires sufficient capital to be set aside to provide a statutory minimum level of income - a "safety net" - and then allows full flexibility on how benefits may be drawn (or, indeed, passed on) for any funds in excess of this level. Such a solution could also involve harmonising the death benefit at all ages post-retirement, eliminating the current excessively punitive potential tax charges on ASPs. This harmonisation could be pushed even further so that the same tax treatment extended across all ages, regardless of whether benefits had been taken. That, of course, would break what has been a tradition - and would provide simplification at all ages.
The proposed increases in capital gains tax rates will make putting relevant assets into a tax free wrapper such as a SIPP more attractive - that would apply particularly to shares and property. It could be particularly attractive where assets are contributed in-specie.
However I think the proposed removal of annuity compulsion will be far more significant for the SIPP market and will be welcomed by providers, advisers and their clients. It removes the need to liquidate investments at a date which is artificially imposed rather than at a date which suits the investor's personal circumstances. It will also increase the average longevity of a SIPP - adding value to providers' and advisers' businesses.
I think the change will also encourage more investors into drawdown rather than an annuity - and hence into SIPPs. That of course will raise other issues given the FSA's concerns over suitability but on balance I think it's a positive development for the SIPP market - and for investors generally. Of course we'll have to wait and see the detail - and what happens to higher rate pensions tax relief.
John Moret is director of marketing at Suffolk Life
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