6 April 2013 went very quietly in pension terms. Okay, there were the usual rushes with regard to paying contributions before the end of the tax year and using carry forward provisions, plus there was the last time to get 50 per cent tax relief but, all-in-all, nothing drastic.
From next year, however, we have the proposed reductions to both the lifetime allowance (from £1.5m to £1.25m) and the annual allowance (from £50,000 p.a. to £40,000 p.a.).
Far from the heady days of 2006 (seven years ago), I currently feel like I am suffering from a classic case of the ‘seven year itch’. And I am not sure that it is going to go away.
In 2002 we had the memorable announcement that the pensions system was to be simplified, and the magic date for all our diaries was to be 6 April 2006 – A-Day. The aim was laudable – replacement of the multitude of existing pension regimes with one new simple one.
Well, seven years later, has it worked? Is it simpler? How do I put this? Erm – probably not!
Some of the changes have undoubtedly worked, for example the idea of full concurrency (membership of as many schemes as you wish), one set of tax rules and the removal of the requirement to annuitise at age 75 (even though the original alternatively secured pension has long since gone).
The ideas of a lifetime allowance and an annual allowance came as a bit of a shock, but the figures given were high enough not to concern too many people, and the rate of increase for the next few years was also published (although, as an aside, I still fail to see the need for an LTA when you have an AA).
This might have worked and the world could have been a simpler place, but then the tinkering took over. The £1.5m LTA went up to £1.8m, then back to £1.5m, and now £1.25m is proposed.
The original AA of £225,000 p.a. went up to £255,000, then dropped to £50,000 and is now proposed to fall to £40,000.
This is where the real complexity started to raise its ugly head.
|How pensions allowances have changed since A-Day|
To start with, we had primary protection and enhanced protection, then we had fixed protection and shortly we will have a new fixed protection and another one – personalised protection. Each will protect an individual’s pension fund at a certain level, with different maxima and different restrictions.
The big reduction in the AA brought in the concept of ‘anti forestalling’ to prevent high contributions being put in pending the change in rules.
All of this was confusing with DC pensions and personal pensions, but it is even more complicated when applied to DB. Throw in a few BCEs and pension input periods and we are nowhere near simplification.
One part of simplification that perhaps gets forgotten was the idea of one investment regime. We do actually have this, but the original proposal for esoteric investments – such as residential property – never got off the drawing board. Even without it this U-turn caused a few issues for the pension world in that, if you cannot invest directly in the asset, then why not create a fund that can? (Are unregulated collective schemes a direct result of this decision?)
As I write this, people are starting to ask about the new protection regimes, how they will work and what level of fund will be protected. More and more people in DB schemes are finding themselves on the wrong end of a tax charge as their benefit accrual has exceeded the equation applying to such schemes.
An increasing number of people will also find themselves subject to the LTA and barred from pension contributions. Records will become confused with regard to the percentage of an individual’s LTA that has been vested and, indeed, which protection regime applies and whether it applies just to the fund or to the lump sum as well.
The next few years will see ever more of the baby boomer generation reaching retirement, and they deserve a simpler regime. My bet, however, is that my seven year itch will carry on for a few more years yet.
Mike Morrison is head of platform marketing at AJ Bell