It now seems to be an accepted fact that our pension legislation needs to be simplified if it is to be of any earthly use to anyone. Everyone these days seems to think we have over-egged it a tad on the complexity pedal.
I suppose I should say this simplification bandwagon is very welcome, even if it has been a long time coming. I do not think it is too late in the day but I would have preferred to have seen steps being taken 15 years ago before it got to this stage. Still…
Just because we are now finally all in agreement that our pension environment needs to be simplified, it does not necessarily follow that we will end up with a simpler system. If past performance is anything to go by, I would not be surprised to see another attempt to simplify things with yet further layers of complexity. This has, after all, been the preferred method of approach for the last five years or so.
Indeed, it is only two years ago that the Revenue issued a press release stating that plans for a radical simplification of pensions were about to be announced, something that at the time seemed too good to be true and unfortunately was.
Criticism, I know, is easy. It is much harder to make positive suggestions. The question begging to be answered is: What would a simple system look like and how would we get there from where we are now? That is two questions really, I know, and the how do we get there bit is the really hard one. But even the first part is difficult to answer because we have no first-hand experience in the UK of simple to understand pension legislation or products.
For what it is worth, and for the record, I do have a vision of what a simpler system could look like and, more important, how we could get there from here. I do not have the time or space to go through all of it here today, just a part. It is perhaps best to deal with it in manageable chunks anyway and the easiest one to start with is individual pensions.
Today, we have many different forms of individual pensions and they all fulfil much the same function. We have two separate legislative environments for personal pensions, also retirement annuity contracts , additional voluntary contribution schemes, free-standing additional voluntary contribution schemes, stakeholder (both chapter IV app-roved and chapter 1 scheme approved with chapter IV benefits) as well as non-concurrency and partial-concurrency rules applying.
Sadly, with Einstein's death we lost any real chance of ever fully understanding how these various exotic forms of pension interact with each other and other state and occupational regimes.
I have had a good idea, though. Why don't we just have one individual pension option in the UK from now on and, (and this is the clever bit) insist that all holders of all existing individual arrangements switch to the new scheme asap? We could even call the new individual pension a stakeholder pension or something suitably inspiring. The insistence that people switch would answer the difficult how do we get from here to there? question.
But why would people switch? I will tell you why. No one would lose out and many would gain. Too good to be true? I don't think so. The new individual pension would simply have to provide all the best features of the existing individual arrangements and have all of the restrictive and unpopular bits missing.
So, we would have full concurrency, the possibility of higher tax-free cash that currently only retirement annuities have, no earnings cap, no benefit limits, tax-free cash on AVCs and FSAVCs, etc. Is that radical or what? It could even make pensions popular again.
Steve Bee is head of pensions strategy at Scottish Life