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Hard acts to follow

Canada Life technical manager Peter Carter says three Finance Acts have failed to provide true simplification of the pension tax regime and many IFAs and consumers are still confused over its workings

Six months on from the introduction of the new simplified pension tax regime, it is an ideal time to review what has happened and learn lessons which can be carried forward for the future.

The process took a long time in the gestation and one would think this would augur well for the smooth introduction of the arrangements. However, in my view, nothing could be further from the truth.

It began almost four years ago in December 2002 when the Treasury published its first consultation document, grandly titled, Simplifying the taxation of pensions: increasing choice and flexibility for all. This paper was greeted with a great deal of enthusiasm as although many were sceptical about the Treasury’s estimates of the number of people likely to be affected by the proposals, there was a degree of consensus that something needed to be done about the ever growing complexity of pensions and the effects on consumers and advisers.

This was followed a year later by more detailed proposals which confirmed the direction of Government policy in relation to pension tax simplification.

Speaking with colleagues, however, I feel that the whole project has somehow lost its way and become something of a bureaucratic nightmare. Apart from the obvious evidence of muddle – the new rules as published in the registered pension schemes manual amount to over 1,000 pages against roughly half that for the previous IR12 and IR76 – it has now taken three Finance Acts (2004, 2005 and 2006) to get the legislation in place in a workable manner.

There are still major issues regarding alternatively secured pensions, with the FSA now suggesting that advisers must question their clients about their religious convictions before recommending an Asp product.

As a major annuity provider, our view on the simplification regime hinges mostly on the taking of benefits – the so-called benefit crystallisation events. There are a number of practical problems which we have come across which belie the fact that we now have a simplified regime.

It is true that a number of issues we have experienced as a provider have been due to a lack of knowledge among some business partners as to the implications of the new rules. However, a major part of the reason for this is the complexity of the rules.

When crystallising pension funds, it is necessary to take account of all pension benefits to ensure the lifetime allowance has not been breached. Where a client has a single pension fund, this is quite straightforward. Where they have a number of pension funds of different types and also pensions in payment, the process can be more difficult, particularly when some of the pensions may have started before A-Day and others afterwards. This could mean multiplying preserved pensions by 20 and those in payment by 25, checking the percentage of pension funds already crystallised and so on. It is taking a great deal of time for advisers and their clients to fully understand the implications of all this and supply the information when benefits crystallise.

Another area of difficulty is knowing who is responsible for what under the new rules. Despite there being regulations available which stipulate who is responsible for giving what information to who, many schemes, particularly final-salary schemes, give information to the member and think their responsibilities end there. It can often prove difficult to get the information from the member as they do not understand what they have been given. This can lead to angry customers and advisers as payments are delayed.

Despite all the talk of Asps and those with big pension funds no longer needing to buy an annuity at age 75, many people still do. We have seen a number of cases where clients want to buy annuities shortly before their 75th birthday with funds that exceed the lifetime allowance. For these people, it is crucial that the payments are made as, if no tax-free cash is paid before age 75, it cannot be paid under the new regime.

Many clients do not realise that they have to apply for primary or enhanced protection and getting certificate numbers in a short period of time can prove problematic, especially when a 75th birthday is fast approaching.

It is interesting to see the Government’s efforts to curb the use of Asps for those over age 75. The legislation on this matter is quite clear. There is an option for those aged over 75 to use an Asp and there is nothing in the legislation which suggests that this option should only be used for those with specific religious beliefs. Indeed, the legislation requires that where a member has taken no action at age 75, they are automatically put into an Asp. This seems contradictory for a Government which is trying to dissuade people from using the option.

The Government has sent out some clear signals. In the Budget, it said: “The Government made clear throughout the development of the new pension tax regime that Asps are specifically designed for those who have a principled religious objection to annuitisation. It has become clear that some individuals and their advisors are intending instead to use the Asp provisions for a much wider purpose to enable individuals to pass on tax-privileged retirement savings to their dependants rather than to provide a pension in retirement. In order to prevent this, the Government is examining how best to restrict Asps to their original limited purpose.”

Treasury economic secretary Ed Balls followed this up on July 4 by saying: “It was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections, such as the Christian Brethren. It has always been our intention to replicate the secure lifelong income obtainable from an annuity through those measures but not to allow that to become a way in which a small and wealthy minority could benefit substantially from tax advantages to the cost of taxpayers overall. We have always made it clear that we shall not allow those concessions to be taken up more broadly to get round the annuity rules. This is not a mainstream product and it must not become a tax-avoidance measure. We shall not be going down that road.”

For advisers, it leaves a great deal of uncertainty. Should they probe the religious beliefs of their clients to determine whether they should offer an Asp or do they simply recommend what they feel is best for their client’s circumstances within the framework of current legislation? As Asp payments to other members are now taxable under inheritance tax legislation, there seems to be no issue of tax avoidance. Our experience as a provider suggests that most people still want to buy annuities as they give a guaranteed income for life, come what may. Add to this the simplicity which they offer and they are the ideal retirement income product for those who have accumulated pension funds.

It seems unfortunate that we are likely to see further changes to the simplified regime in the next Budget, which means it will probably take four Finance Acts to get the situation right.


Prime Professions in PI deal for IFAs

A group of former Alexander Forbes directors has set up a professional indemnity brokerage for IFAs.

Prime Professions has been servicing the legal, accounting, construction and insurance professions for a year and is about to target financial services intermediaries.

The firm says it is launching to the IFA community on November 1 to coincide with the renewal date for most IFA contracts.

Prime says it will offer an indication of PI renewal terms without the need to complete a proposal form.
The firm has been added to the panel of brokers for insurance company Chubb.

Prime says it is the biggest threat in the market to rival companies PYV, NCG and First City’s non-network IFA business.

Managing director Duncan Philpott says: “We want to get back to talking to clients and moving away from the old-style values. People’s changing attitudes and a softer market bring the opportunity to make a difference.”

But PYV chief executive Neil Pointon says: “I would have thought that a new underwriter would have brought more value than a new broker. If I was an IFA, I would be very wary of a new firm without a proven book of business.”

Lawson blames actuaries for DB ‘bungs’

Standard Life head of pensions policy John Lawson says the actuarial profession is to blame for firms offering “bungs” to employees to opt out of final-salary schemes. In Money Marketing last week, president of the Faculty of Actuaries Stewart Ritchie said IFAs will be made the scapegoats if staff complain they lost out by accepting […]

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Trouble ahead - thumbnail

Pensions: trouble ahead?

The pace of change in the pension’s space has been little short of astonishing, and has left thousands of employers struggling to keep their pension policy compliant, and also on the right side of current best practice and governance. Many employers, and indeed many in the pensions industry itself, would like to see a period of no change during the next term of government. This would give all sides a chance to catch up and draw breath. 


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