I cannot believe reports in the papers about what is happening with pensions. As a nonregulated accountancy firm, is there anything we should be doing for ourselves but, more important, is there anything we should be doing for our clients?
Chancellor Gordon Brown is not prepared to discuss the £1.4m lifetime limit. He has asked the National Audit Office to look into the number of people affected and we will not know the answer until the 2004 Budget. The answer will determine if any changes take effect.
It would be easy to assume that only clients with big pension funds might be affected by pension simplification. This is not the case.
You need to identify all funds which could approach or exceed the £1.4m limit. We will be able to preserve the existing funds without the penal tax charge by ringfencing. If we do not ringfence the existing funds, your clients will be able to take £350,000 as tax-free cash, with the remaining money up to the £1.4m limit used to provide income using either an annuity or drawdown. Any remaining fund will fall foul of the new tax charge, being an accumulated 55 per cent.
Because there is no wavering to the requirement that no death benefits be payable after age 75, some clients might prefer to take the excess over the cap as a taxed benefit, putting money in their own hands.
Any advantageous tax-free cash amounts over the proposed 25 per cent figure also need ringfencing. This will affect people in company pension schemes or section 32 buyout schemes. So, in addition to identifying all those clients with potentially big funds, you also have to look at those with old funds and long service, probably with relatively small funds.
Only a few weeks ago, it seemed that there was no way to include residential property in a pension scheme. Now, investors will be able to purchase and use residential property and other exotic investments.
As accountants, this area is going to be especially challenging for you, particularly with the new tax charge on pension benefits in kind.
Anyone involved in residential or commercial property development perhaps needs to be informed that they might be able to use their pension fund for that purpose in the near future. That same group of clients needs to be informed about the new rules concerning borrowing. From April 2005, all the old rules disappear, to be replaced by one rule which allows borrowing for an amount equal to half the value of the pension fund. Those clients you have contacted concerning commercial property need to be aware of these changes, particularly due to the often long lead-in times concerning the purchase of commercial property.
If you are involved in divorce matters as they relate to pensions, there is a further interesting change. Today, where a pension share arrangement is made for high earners, the debit created remains as a debit against maximum benefits. The person receiving the credit is able to take this extra pension value in addition to any maximum benefits. From April 2005, this will change so that both parties will be able to accumulate funds up to the £1.4m limit, regardless of any pension debit or credit.
If we take the situation where the ex-husband has a £1m pension fund which is shared equally, under the new legislation he will be able to replace his loss up to the cap. The ex-wife will be able to do the same, whereas previously she would have been able to have maximum benefits plus the £500,000.
In big money cases, it must be decided if the pension sharing order is to be issued before or after the new legislation. It is also necessary to look at existing pension sharing orders from a ringfencing point of view.
In summary, it is not just big pension funds we need to look at but also those where there are generous tax-free cash allowances.
Anybody involved in property purchase, particularly if borrowing is anticipated, will also need to be made aware of the proposed rules as quickly as possible.
Finally, high-net-worth clients involved in divorce will need to be taken through the preand post-pension-share positions.