Thank you for keeping me informed about the proposed changes concerning pensions.
I am concerned that the timetable for the introduction will be tight. Is there anything I should be doing now to help my clients through these changes?
You are right to be concerned about all the changes proposed as several are extremely complicated and wide-reaching. Thankfully, it appears that their introduction has been put back until April 2005.
In the past, whenever pension legislation has been changed, it has tended only to affect new situations from that time onwards. An example of this would be additional voluntary contribution schemes.
Before all the changes to pension legislation in the late 1980s, it was possible to use voluntary contribution schemes to fund tax-free cash. Following the changes, any new schemes could not be used to provide cash but existing schemes are allowed to continue under the old basis.
The proposed changes are going to reverse this process. The proposals are that all pensions will now be governed by the new “simpler” legislation unless action is taken to ringfence the old benefit. Fund values, contribution limits, and simplicity concerning retirement all appear to be better under the new proposed legislation.
Unfortunately, there is always a sting in the tail and we have the proposed maximum pension fund limit of £1.4m. Anyone with a pension fund approaching or over this size should seek to ringfence their pension to avoid the new proposed Draconian tax charges.
So we need to know the full value of all clients' pension funds. However, it is not just the big schemes.
One of my clients has an employee money-purchase scheme in place with quite small contributions. This firm has very loyal, long-standing employees, most of whom started work and joined the pension scheme in the early 1980s. When these employees retire today, they always take all their pension fund as a tax-free cash payment.
Any active pension scheme member who joined their occupational pension scheme before 1987 might have this ability.
If we do not ringfence this scheme, then those employees will suddenly find themselves only being able to take 25 per cent of their pension fund as tax-free cash, with the remainder of the fund being used to provide a pension.
Who is going to be liable if they start complaining or, worse, suing?
The proposed pension legislation will change many existing laws but there is nothing that will change the contract between the policyholder and the insurer. Regardless of whether the legislation says that we will now be able to take 25 per cent of our fund as tax-free cash, if the contract with the insurer is, say, a retirement annuity, the terms and conditions of that policy will still override. If that policy is not ringfenced, we will have to provide 25 per cent of the fund as tax-free cash or the contractual terms will apply.
You ask what you should be doing to prepare for the changes. Today, you need to identify the pension arrangements of all your clients. A full audit of those pension policies is required so that informed choice can take place when we know exactly what the new legislation will be.
Do not assume it will be only the bigger-value pensions that will be caught up in the new changes. Every pension, old and new, deferred or active, must be reviewed in readiness.