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New rules send ripples across pension pond

In all the furore over stakeholder pensions, it would be very easy for advisers to take their eye off the equally significant changes that threaten the current individual pension market as we know it.

Self-invested personal pensions, small self-administered schemes, personal pensions, executive pension plans, free-standing AVCs and annuities are all facing a major overhaul as a result of three major catalysts – the downward pressure on prices, legislative reform and the impact of new technology.

I do not envy any adviser operating in the pension market at present as the pace of change is frightening. In the last few weeks, the Inland Revenue has published a new version of IR76 – the guidance note for personal pensions – along with memorandum 69 which confirms changes announced earlier to some operational aspects of SSASs.

New regulations have been passed in the last few weeks which deal with changes to the tax relief at source regime. These provide for all contri-butions to personal pensions on or after April 6, 2001 to be made net of tax regardless of whether the individual is employed, self-employed or non-earning.

There have been changes to the rules governing the organisations that can establish a personal pension scheme and details have been set for the new regime for concurrent membership of occupational, personal and stake-holder schemes.

We have also received the definition of a Sipp and new rules on the information required from the administrators of personal pension schemes. These are particularly relevant to those involved with Sipps since they impose significant additional reporting requirements relating to investments although the detail is still not known.

Most of the changes which are being brought about by the new regulations are set out in the latest version of IR76 which, as a result, should be compulsory reading for all those involved with advising on personal pensions, both pre- and post-April 2001.

Regrettably, those who have already delved into the new version of the personal pension “bible” will discover two crucial sections remain conspicuous by their absence.

Despite the new regulations on information powers, the Revenue has still not confirmed the range of permitted investments for Sipps.

At the moment, administrators are in the somewhat farcical situation of being obliged from October 1, 2000 to report to the Revenue on a range of investment transactions, including the acquisition or disposal of land, the borrowing of money and the purchase, sale or lease of any asset other than land. Reporting is required within 90 days of the date of the transaction.

The draft regulations issued in July were accompanied by a note that, although the regulators require schemes to report all transactions, this will be limited to those transactions that meet specified criteria. The note went on to say that the Pension Schemes Office will be discussing with representative bodies the exact categories to be used.

This clearly is linked to the missing permitted investment regulations and guidance. We understood these regulations were to be issued in draft form in August but to date nothing has appeared.

My latest understanding is that we may expect these before the end of September. However, this hardly fits with the investment reporting requirements set out above and we remain concerned about the way this critical issue is being handled – not least because of apparently changing Revenue views on certain investments such as hotels.

If the position on permitted investments is farcical, then that on transfers is verging on shambolic. Long-awaited draft regulations were issued in July for consultation. We were not alone in being very concerned about the proposed new regulations since they include:

New assumptions for calculating transfer values that do not adequately reflect market conditions and could, therefore, lead to a significant reduction in the transfer values that can be paid.

An arbitrary distinction in the treatment of taxpayers depending solely on whether their earnings fall above or below half the earnings&#39 cap.

Inconsistencies in the treatment of death benefits following a transfer.

In its covering note, the Revenue stated that the aim of the new regulations is to simplify transfer arrangements and reduce the number of individuals who are subject to the special certification rules. No one would disagree the current regime is unnecessarily complex and the Revenue&#39s aims are laudable.

Unfortunately, the reality is that many more individuals will be caught in the transfer trap as a result of the halving of the earnings&#39 threshold.

Effectively, the Revenue is moving the goalposts and many individuals in occupat-ional schemes such as EPPs and SSASs may find that their transfer values are reduced or that the option to transfer is removed.

This is potentially a damaging development for pension schemes and is contrary to the aim of encouraging more people to save for retirement via approved pension schemes.

Very worryingly, on its website, the Revenue intimates that, while it is still considering comments on the draft regulations, it hopes to pass the regulations during September. The Revenue should think again and delay taking action until it has had further discussions with the industry.

As if all this was not enough for advisers to take in, the new IR76 confirms a number of significant changes to the operation of income drawdown following on from this year&#39s Finance Act. All these changes are important, particularly to high-net-worth clients.

On the surface, many of the changes will add costs to providers which may have to be passed on to clients. This, of course, runs contrary to the drive for cost reduction on the back of stakeholder developments. These cost issues, will, in my view, be critical to the future of the traditional individual pensions market as we know it.

This is where technology is so important. Unless providers can find a way of streamlining their processing thr-ough the use of web-based technology, it is easy to envisage a situation where traditional pension products will be squeezed by stakeholder at the lower end and by more flexible products such as Sipps at the top end.

I believe the Individual Pension Account, which is still largely hidden in a pre-dawn mist of the Revenue&#39s making, may well turn out to be a big threat to the insurance policy-based individual pension. Certainly, life companies will have to respond with new products that can compete with the stated aims of an IPA – personal ownership, flexibility and transparency.

Of course, these are the main attributes of Sipps which is why I believe that, far from being a threat to Sipps, IPAs will actually act as a further catalyst for growth in the Sipp market.

With the advent of electronic trading, Sipps are no longer necessarily a product for the better-off few.

I expect to see Sipp pricing fall so that individuals and their advisers will have the opportunity to establish and manage direct equity portfolios on a pricing structure which will be competitive compared with the alternatives. The long overdue removal of compulsory annuiti-sation will simply accelerate the demand for the investment flexibility that Sipps offer.

The opportunities facing advisers as a result of this shake-up of pension legislation are enormous. The face of the pension marketplace is set to change. I leave you to draw your own conclusions on who the winners will be.

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