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Keep A-Day on track

Our panel say no delay for A-Day and assess the practicalities for investing residential property in Sipps.

Should A-Day be delayed?

Naismith: No. It is highly unsatisfactory that the legislation has not been finalised yet and will not be until after A-Day but further delay would be detrimental to consumers and the industry. A-Day brings fantastic financial planning opportunities and we should have them available as soon as possible.

The timescale is extremely tight, but most product providers know what they need to do and how to go about it. Advisers have been giving guidance to clients based on A-Day being in 2006 so further delay would create extra work (and possibly invalidate advice already acted on).

Buchanan: It is fairly easy to make a case for delaying A-Day, based on the Revenue’s stated intention of giving the industry a clear year to prepare for the major changes required. But provided that we get the outstanding information with the minimum of further delay, I think that most people are keen just to press ahead and get the job done by April 2006 but it is up to the Revenue to deliver.

McPhail: Absolutely not, and I believe it is irresponsible to suggest it should be delayed. It has been delayed twice and any further procrastination will only undermine public confidence in pensions. For all its faults, the simplification legislation is a positive step and it can be built on with the subsequent legislation which is already inevitable. Some life offices, IFAs and investors will not be ready for A-Day but this is not important in the overall scheme of things.

What chance is there that protected rights will be allowed into Sipps?

Naismith: I regard it as unlikely because the Government wants protected rights to be as secure as possible and regards Sipp investments as very risky. We would support protected rights being allowed in Sipps but a bigger issue is having to treat them differently after retirement. The requirement for escal- ation in payment has gone but they still have unisex annuity rates and compulsory partner’s pension (for married people and those in a civil partnership). So, for example, protected rights still have to be held separately in income drawdown, even though the limits are the same as for other benefits.

Buchanan: There should be a good chance of succeeding with this argument. After all, simplification is the primary objective of the A-Day changes. It would be a great shame if the DWP was unwilling to follow the Revenue’s lead in this respect. There must be some scope for a pragmatic compromise, for example allowing protected rights within a Sipp but subject to special investment rules.

McPhail: It does not look good but that is not reason enough to stop trying to make it happen. The Department for Work and Pensions has made clear that it does not approve of the idea for reasons of principle. Protected rights are replacement state benefits and so should not be exposed to unnecessary risk and Sipps offer excessive opportunities to invest in high-risk areas. I believe that this philosophy is flawed and that the benefits of allowing it to happen, in terms of consistency and simplicity, outweigh any marginal disadvantages.

There have been mixed results in research on residential property going into Sipps in that its pop- ularity could go either way, what is your view on the situation?

Naismith: Many people who are very attracted by the idea at present may be put off by the practicalities. For example, because the property is owned by the pension scheme, any structural changes will need to be agreed by the administrator and funded from within the scheme. The complications of dealing with different legal and tax reg- imes overseas will deter most from having holiday homes in France or Spain in their pension. There will probably be a significant buy-to-let market, but other opportunities have been overhyped.

Buchanan: There is no doubt that lots of people are going to be enthusiastic about the potential of investing in residential property through a Sipp. This is great news for IFAs as it is clearly a complex area which will be very advice-intensive. Ultimately, for many people, it may well prove to be impractical (in the short term at least) because of the size of their pension fund. For many others, it may be inadvisable because of the risks of having a high proportion of their pension fund invested in a single asset class. Whatever the outcome, it is good news that, for the first time ever, pensions may well be sexy.

McPhail: Some people will benefit from investing in residential property through Sipps, possibly even some clients as well. I believe, however, there are significant long-term systemic risks involved, which are not being adequately allowed for and that at an individual level there is an asset allocation risk for all but the wealthiest investors. Generally, the returns will not be as attractive as for non-pension BTL investments, if the tax relief is taken out of the equation. On the plus side, it will help to make pensions fun, and I am all for that.

What do you expect in the upcoming Finance Act in relation to pensions?

Naismith: Some of the changes outlined in the Inland Revenue’s technical note may be included but we do not expect substantial changes. The bulk of proposed chan- ges to the Finance Act 2004 were incorporated into the Finance Act 2005.

Buchanan: Most likely nothing, as the pension items in the 2005 Finance Act are all those that were put forward in the original Finance Bill.

McPhail: Tidying up loose ends on simplification, the IHT treatment on death benefits. For the rest, wait and see.

After A-Day, do you expect there to be any retrospective legislation?

Naismith: It is very likely that there will be changes to the calculation of the tax-free lump sum where a scheme pension is chosen. The Government has already announced that it plans to consult on that and include any changes in the Finance Act 2006.

There may well be other changes, either because there are further areas of the orig- inal legislation which need corrected or because the Government identifies loopholes that it wants to close. Hopefully, these will be flag- ged in advance, so we know by A-Day what they will be.

Buchanan: Absolutely. The huge amount of retrospec- tive change that Finance Act 2004 introduced means that the genie is well and truly out the bottle. The reality is that any pension regime will have to change over time. If we do not continue to have retrospection as part of that process, we will end up with layer upon layer of future complexity – exactly the problem that the Revenue is trying to address with the A-Day simplification.

On a practical level, depending on the outcome of the expected consultation on tax-free cash and scheme pensions, we may well see retrospective change included in the 2006 Finance Bill.

McPhail: Wait and see what Turner and then Blunkett have to say. If they start monkeying around with the state pension and the tax relief system, as is widely hoped, then anything is up for grabs. The Inland Revenue has set a precedent for retrospective legislation so it has to be a possibility. The good bits of the simplification legislation are a good thing, the biggest problem with it was it was not radical enough. If the Revenue feels like coming back and finishing what they have started, then I would not complain.

Can Clerical Medical sustain its high commission payments on stakeholder?

Naismith: Every provider must set its own policy terms based on its profitability cri- teria, financial strength and marketing strategy. Like everyone else, Clerical Medical will regularly review issues such as capital strain and likely persistency when deciding whether commission rates and policy terms are sustainable.

Buchanan: No. This is a tactical campaign which cannot be sustained. The stakeholder AMC-only charging structure is unstable and unsustainable, especially in the IFA sector. However, the answer is emphatically not for providers just to pass the problem on to IFAs through steep cuts in commission rates although many companies appear to be following precisely that route. It is essential the market moves to a sustainable model, which makes commercial sense for both the IFA and the pro- vider, as well as providing good value to the policyholder. Such a model does already exist and must show the way ahead for all providers.

McPhail: Ask the owners. Precedent, and current trends suggest it is unlikely. Persistency is not likely to improve significantly, if at all, and neither are the margins between income and costs which Clerical Medical will experience. Given that they are almost certainly making a loss now, I do not see where else they can go. There are good times to buy business and there are bad times. For Clerical Medi-cal, for now, it makes sense, enjoy it while it lasts.

Ian Naismith, head of pensions market development, Scottish WidowsAlisdair Buchanan, head of communications, Scottish EquitableTom McPhail, pensions research manager, Hargreaves Lansdown


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