Two months ago, in these pages, I wrote how pension freedom would penalise most pension savers in the UK. An increase in pension fund taxation (£3bn over the next five years), depletion of pensions savings, product innovation and the compounding effect of further complication are all risks. But with the sight of new rules in this past week I can consider my clients with a feeling of positivity.
Pension savings will continue to be the single most tax-efficient investment an individual can accrue in their lifetime. No other asset offers tax-free savings, avoiding income tax, corporation tax and both flavours of National Insurance.
Funds grow virtually free of income and capital gains tax. Inheritance tax exemption applies on most death benefits and as bona fide income, gifts can normally be made in retirement without any seven-year potentially exempt transfer clock ticking, as long as they are regular and do not affect one’s standard of living. The previous explicit agreement that tax reliefs came at the expense of pension freedoms has now been torn up.
All of which is great for planners. Financial planning has arguably been about achieving client objectives in the most tax-efficient ways and we have more ways of juggling many options while mitigating the four major taxes: income tax (including National Insurance), capital gains tax, inheritance tax and corporation tax.
If a client is prudent enough to have engaged a financial planner, they are unlikely be looking to squander their retirement pot. And an individual who may have avoided pension savings fearing reduced access will be more likely to save.
The rules proposed for the mitigation of abuse seem reasonable and proportionate. Clients will be able to supplement employment income for years while still avoiding 40 per cent income tax by saving to pensions and drawing tax-free lump sums or non-flexible annuity purchase (my term to differentiate from the new varieties proposed), both of which are excluded from triggering reduction of the annual allowance to £10,000.
I am ambivalent to the guidance guarantee. Guidance is not a threat to meaningful, detailed holistic advice. The current position, where decisions are mind-blowingly complicated and the ‘bad’ option (not exercising open market options) is the simplest default, will hopefully be eroded. If we do not like guidance we should be lobbying the institutions which have created a world where pensioners cannot shop around.
Banning defined benefit transfers would have been a sledgehammer to crack a nut. Transferring is still likely to be the wrong thing for most but those in very poor health or other rarer situations should be entitled to spend their funds as they wish.
The reduction from 55 per cent income tax on death is a small but welcome change. Most widows or widowers may still prefer to annuitise on first death but it will be good to be rid of this current strange penalty on crystallisation.
There is work to be done before April 2015 and many of us will recall the changes proposed – then changed – in 2005/06. This time there is too much at stake for the Government and we should treat this as the most positive time in pensions and financial planning history.
Alistair Cunningham is financial planning director at Wingate Financial Planning