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Grandfathering struck down

The response to the Government&#39s Green Paper from the media, many politicians and pension organisation has been generally negative although for different reasons.

The criticisms fall into two main camps – those who wanted compulsion in some form, largely ill-defined, or not defined, and those who wanted something done to counteract the moves by employers to reduce their open-ended liabilities under defined-benefit schemes.

In the case of the former, the Government has appointed Adair Turner to review whether the current voluntary regime for UK private pensions and long-term savings is on track. In the case of the latter criticism, the move from DB to DC schemes is relentless. Nothing will stop that although a return to positive investment returns may stem the flow.

Many of the proposals in the Green Paper are welcome – giving greater protection to scheme members on the wind up of schemes, promoting employment among older people and taking forward many of the suggestions made by Alan Pickering in his independent report, A Simpler Way to Better Pensions.

Of much more interest to pensions practitioners, although largely ignored in the national press, is the Inland Revenue&#39s consultation document that accompanies the Green Paper. The Revenue proposes radical changes.

Over the years, changes to pension legislation have not replaced previous law and practice but have added other layers, culminating in a complex strata of rules and regulations. In geological terms, if you bore down through the earth&#39s crust, you find a series of rock seams. The Jurassic Age finds pre1987 pensions law before the earnings cap found in the Cretaceous period. Old retirement annuities are found on the Permian Age, with subtle differences over personal pensions discovered in the more recent Pleistocene Age.

To pension practitioners rather than geologists, this is known as grandfathering. Well, grandfather now has a terminal illness and practitioners will have their work cut out to inform their pension clients of what the Revenue&#39s proposals will mean for their retirement planning. If some of these clients were hoping to use their pension plans for estate planning, then they will have to think again.

In essence, the new pension regime will replace all the previous layers of law rather than sitting on top of them, thereby simplifying matters considerably. The new pension lifetime tax limit of £ 1.4m per person (indexed in line with prices) will apply to new scheme members and also to existing scheme members.

Pension rights built up before A-Day, when the new law comes into force, will be respected subject to the limits in place before A-Day. Pensions rights beyond the lifetime limit will be indexed and honoured. However, it will not be possible to continue saving under the previous rules.

IFAs will be anxious to find out exactly what the changes mean for higher earners who often form a large proportion of their client banks. Directors with executive pension plans, especially those that currently enjoy pre-1987 approval, will need careful advice. They may need to stop or reduce pension contributions, otherwise face a tax charge.

IFA clients often include people with big funds in retirement annuities, self-invested personal pensions, executive pension plans and small self-administered schemes. Others include those aiming to retire on pension at 50 who will have to wait until 55 if they retire after 2010 and clients considering drawdown and/or annuities where greater flexibility will be available.

Small self-administered schemes, where assets include loans to the employing organisation and properties from which employers conduct their businesses, will face significant change, probably a complete reappraisal of investment strategy, over time.

Many questions relating to these transitional arrangements need to be raised with the Revenue before the full impact of the changes is known. However, once the transitional rules are fully developed, the new pension structure will be much easier to understand.

Although some practitioners have relished being able to advise people on how to navigate the pension minefield in the past and who will find this opportunity closed in future, a new simpler tax structure will be of benefit to the pension industry as a whole.

The intention is for A-Day to be April 6, 2003 although this looks 12 months too soon considering the issues that still need to be resolved.


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