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MM leader: Pension reforms show Govt is serious about simplification

The new pensions tax rules appear to show that the Government is serious about attempting to deliver the kind of simplification the previous administration failed to introduce.

The headlines last week may have screamed about another tax hit for Middle Britain but, given the economic conditions and the rules Labour was looking to introduce, the coalition has reached a sensible compromise.

Importantly, Treasury financial secretary Mark Hoban and his Treasury team have listened to the industry concerns expressed following the initial proposals that were put out for consultation in July. Listening to the valid concerns of the pension industry was not a favoured pastime of the previous Government and this led to a great deal of bad policymaking.

The £50,000 allowance is higher than we were expecting, perhaps a case of the Government managing expectations but welcome nevertheless.
Its move to offer relief at the highest marginal rate retains an important principle while removing another layer of complexity.

It was inevitable the factor used to calculate contributions to definedbenefit schemes would be increased but again this was not as severe as feared. Unused allowances can be carried forward for three years, allaying concerns that individuals looking to make bigger one-off payments will be hit.

The lifetime allowance is to be cut from £1.8m to £1.5m and we are promised another consultation paper later this year to examine ways of
protecting investors closing in on the lower limit and remove the possibility of retrospective taxation.

The Government has sensibly delinked trivial commutation levels from the lifetime allowance, meaning it will not fall due to the lifetime allowance cut. However, introducing a fixed annual allowance does leave question marks about whether a lifetime allowance is needed and a number of industry voices are calling for this to be removed.

Hopefully this move to simplification is a sign of things to come. The reform of annuitisation rules, which includes the scrapping of Asps and the
introduction of flexible drawdown, will also have a positive impact although again there are important arguments over the detail. For instance, the 55 per cent tax on unused funds seems unnecessarily punitive.

The Government must stick by the overriding principle that pensions must be kept as simple as possible to encourage as many people as possible to save.

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  1. It’s a start, but there’s still a long way to go to rebuilding public confidence in retirement saving. The next steps should be the restoration of WoP and life cover, the latter perhaps subject to a minimum level of contributions to retirement benefits. I learned yesterday of the proposal that it will be permissible for the whole of an accumulated retirement fund to be drawn and spent, subject to tax of course and a minimum level of income from other sources, though I’m not sure that’s entirely the best way to go. The other big issue is to remove GAD rates from the equation for everybody, regardless of overall income, but on that we’ll have to wait and see.

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