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Chubby cats get the cream

The tax changes that will come into force on April 6, 2006 were designed to achieve a number of outcomes, one of which was to apply retrospective taxes to what the Government regards as the excessive pension savings accumulated by many so-called fat cats.

The original proposals were watered down during the con- sultative phase, giving fat cats the chance to fully protect what they have already got, as long as they agree to leave the UK pension system for good and give up any future accrual.

This has given the senior directors of UK plc plenty to think about in the run-up to A-Day as they hurriedly set about rearranging their financial affairs and remuneration packages. Fat cats who do not get their affairs in order will get hit by 55 per cent tax on any pension savings above the life- time allowance.

Obviously, this shock to the complacency of fat cats has caused a bit of a stir. The FSA has been quick to point out that advisers have a duty of care to their clients to ensure they are aware of the changes and able to protect themselves if necessary. Those fat cats who are not under the protection of financial advisers are doing their best to get acquainted with one quickly. It’s dog eat dog in the fat cat world.

To some extent, this understandable focus on the problems confronting fat cats has served to obscure the other fundamental and interesting changes that are coming in on A-Day. It is these changes to our pension laws that will give rise to the age of the chubby cats, as people are given more control over their existing pension assets.

The changes coming in on A-Day are not just tweaks to the system – they are a complete rewrite. The fat cats seem to have had their day as far as pensions are concerned and the chubby cats are about to have theirs. This is not some- thing that fat cats would have wanted or chubby cats could have expected from reforms that set out to simplify the UK pension system. However, it is what has happened as those reforms have so badly missed their target.

The age of the chubby cats will come about as a direct result of the decision by the Government to completely redesign the existing pension system as a means of promoting pension savings by those not covered by it.

The loosening of the ties that have hitherto tightly bound the biggest single pile of pension funding in the whole of Europe will result in many people assuming personal control over their pension assets. The eventual magnitude of this shift will depend on how many individual decisions will be taken to do this. How much of the 1.3tn in funded pension assets today will be taken under the control of individuals? Nobody knows but the chubby cats will lead the way.

That self-invested personal pensions and unsecured pensions will play a much bigger part in the pension planning of the chubby cats is beyond doubt. These Sipps, sold to people later in life than personal pensions tend to be today, will be more likely to have higher levels of persistency and premium input than the pension industry has experienced thus far. This will make chubby cats and older people in general seem much more desirable as pension clients than younger people in the post-A-Day world.

The limited number of IFAs operating in the UK will also find their resources stretched as millions of older people currently in occupa- tional schemes wake up to the fact that their pension options are being widened out just as their employers’ pension schemes are being scaled down. In a world dominated by the probability of means-tested welfare for millions, it will be easier to advise someone who already has a pension to make more pension savings than to advise someone with no pension savings to start a pension.

The chubby cats in occupational pension schemes will become the most desirable pension clients for financial advi- sers after A-Day.

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