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Minesweeping the pension proposals

The major worry about the Government&#39s pensions tax proposals, Simplifying the Taxation of Pensions, published in December 2003, is that they might be shelved.

Despite the fact that considerable simplification of pensions will result if the proposals are implemented, some organisations and individuals have complained about the number of people who will be affected adversely by the introduction of the new lifetime allowance of £1.4m.

The National Audit Office will consider this issue and report before the Budget 2004 in order to allow an announcement to be made in the Budget on whether or not the Government will introduce the new simplified regime.

If the Government decides not to proceed, then the existing regimes will remain in place. Take it or leave it. There is no third way.

The simplification proposals will bring about considerable benefits that will outweigh the negative impact on some high-earners, mainly those who were members of approved pension schemes before 1989.

Dropping the proposals would be a disaster for the pension industry and for financial advisers who operate in the pensions market. Some financial advisers have specialised in helping clients understand the complexities of the current pension regimes but over the years the landscape has become a minefield that only a bomb disposal expert can navigate and defuse.

The rules have become so complex, for example, on transfers between the different tax regimes, that communicating options to clients within a strict regulatory framework is prone to error and costly to put right in a litigious society.

The new pension proposals will sweep away many of these complexities so financial advisers will be able to communicate more easily with clients, leading to a better understanding of pensions generally.

Management charges on pension contracts have reduced considerably in recent years in line with the stakeholder pension benchmark so a continuation of the current eight regimes is simply not a sensible option.

Although the new regime will be much simpler for consumers to understand, there will still be a place for the financial adviser who wants to specialise in this market, especially during the next 12 months before the new regime starts.

Existing clients will want to know how the changes affect them, in particular, people who are likely to have pension funds of more than £1.4m on A-Day (April 6, 2005) or those with funds where the tax-free cash entitlement is more than 25 per cent of the fund – a common position for people who joined schemes before 1989 and who will accumulate modest funds by retirement.

Those with funds that are likely to exceed the lifetime allowance on April 6, 2005 will have the opportunity of stopping pension contributions, registering their plans and not paying the 55 per cent recovery tax. Alternatively, if they want to continue to pay contributions, they can do so but will eventually be liable for the recovery tax on the growth above RPI on the value of the registered fund plus the fund secured by contributions paid after A-Day.

Financial advisers are in an ideal position to help clients consider these options and to help them look for other tax-efficient methods of investing money, where the decision is made to stop pension contributions.

The key point will relate to the registering of schemes with the Inland Revenue in order to preserve existing rights and to avoid the imposition of the recovery tax charge.

Greater investment choice will also be available under self-invested schemes and where schemes are considering borrowing to finance property purchase there may be an advantage in acting before April 6, 2005.

Looking further ahead, the greater flexibility under income-drawdown plans and the introduction of new types of annuity will improve retirement planning options for consumers and the need for advice from financial advisers.

Finally, the simplification changes will throw up many opportunities for advising employers on pension scheme design, especially in relation to death in service benefits and changes to minimum retirement ages. We must hope that the National Audit Office does not throw a spanner in the works and cause the Government to drop the simplification project.

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