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A-day chaos ahead?

Whatever pension simplification rules the Inland Revenue finally puts in place, over the next two years, a lot of people are going to need detailed advice about a large amount of retirement savings.

Human resources consultants Mercer says around 290,000 people are on track to hit the £1.4m lifetime limit at some stage in the future under the current Inland Revenue retirement saving proposals. That number could double within 15 years if earnings growth outstrips prices.

The figures as to how many people will be affected by the new lifetime limit varies greatly. The Government figure of 5,000 being hit by the limit only covers individuals with personal pension plans over £1.4m at A-day, the date the new rules take effect. But Standard Life estimates the true figure is 15,000 with executive pension plans taken into consideration. One wonders what the figure would have been three years ago when equity values were so much higher.

Mercer says the current £99,000 cap on pensionable earnings, introduced by the previous Conservative Government, curtails saving for 170,000 people. The effect of the £1.4m lifetime limit, if it is attached to prices, will, according to Mercer, bring a further 120,000 people – many at middle management level – into that group.

These people and thousands more on track to hit the lifetime limit within the coming years will all want to go into drawdown or fixed interest rather than take risks on equities only to see the recovery charge penalise their returns and the wider figure from Mercer reveals the magnitude of the size of the challenge and opportunity advising these high-earners presents.

Standard Life senior technical manager John Lawson estimates 15,000 individuals hitting the lifetime limit at A-day could see £30bn-worth of assets moving out of pre-retirement equity saving.

Lawson says: “Because of the punitive nature of the recovery charge, people will ask why are they staying in equities. We would like to see an overall charge of 47 per cent, which we think is neutral, rather than the current 60 per cent hit.”

We do not yet know what the new rules will look like but such a fundamental change to retirement savings legislation is bound to cause upheaval in the funds invested in pensions, currently between £1tn and £1.3tn.

Scottish Equitable pensions development director Stewart Ritchie says: “If we see the rules staying as they are it is likely we will see an increase in assets held in fixed interest. One way around the problem is to vest on A-day. If you want to continue holding equities you can take your tax-free cash and draw £1 a year and stay invested.”

Ritchie says: “We have always seen these proposals as something that will lead to more people into drawdown. IFAs interested in pensions and not currently doing drawdown should be looking hard at drawdown issues.”

With current annual new drawdown business in the region of £2.2bn a year, it would seem a fair assumption that once the Revenue and DWP publish draft rules the skills of existing drawdown specialists are likely to be in high demand.

If even 5,000 people hit the limit with funds of £1.4m or more, that adds up to £7bn in funds moving around on or near A-day – most industry estimates put the figure considerably higher.

The problem pensions IFAs have over this period is the uncertainty – their clients have some idea there will be radical changes but advisers cannot yet say what they will be. With so many responses from the pension industry as to how to solve the problems the Revenue&#39s proposals throw up, IFAs could be forgiven for being confused as to where the consultation is going.

The experience of the stakeholder consultation process shows original proposals can undergo major transformation by the time they hit the statute books, but most industry figures are not predicting a U-turn on the taxation simplification plans.

Norwich Union executive chairman Philip Scott has lobbied for the lifetime limit to be based on contributions rather than fund value at retirement so people can remain invested and enjoy the benefits of investment performance but he is not expecting wholesale changes by the Revenue.

Scott says: “In my view, there will be a lifetime limit of some sort – the size of that limit should be looked at but the underlying principles will remain. The simplification of the tax structure will be of benefit to the IFA market because it will lead to radical growth in the amounts people invest in pensions.”

The number of people who will be hit by the limit will depend on how much the Government listens to the opinions of the pension industry.

The urgency with which IFAs are called upon to give that advice will depend on the run-in time between the publication of rules and A-day.

Few in the life industry expect the Revenue to keep to its published timetable of putting new rules in place in April 2004. With draft rules unlikely to be available before late summer – which could be autumn in DWP-speak – most life companies and IFAs see that deadline as completely unrealistic.

Scott says: “April 2004 is an almost impossible target – we expect a realistic date for A-day to be April 2005.”

Given the trouble most IFAs have getting a single valuation out of a life company, we can only hope Scott is right. The alternative is the IFA sector engaged in a chaotic scramble for data as clients look for advice on what to do.

Hargreaves Lansdown pensions research manager Tom McPhail says: “If the Revenue presses ahead with a 2004 implementation date we will descend into a ludicrous mess where life offices administration systems are swamped by IFAs trying to get information to restructure clients&#39 portfolios.”


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