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No map to close the gap

It came as no surprise when the Pensions Green Paper failed to deal with

the interface between state and private provision. With the pension credit

preparing to take its first steps, an overhaul of means-testing was never

going to be on the cards.

But although moving away from means-testing was never likely to happen,

IFAs and providers have been disappointed that there is nothing in the

Green Paper to bring new savers into what Alan Pickering described as the

pension fortress.

The industry has broadly welcomed the Inland Revenue&#39s truly radical

proposals for the simplification of the taxation of pensions and the

adoption of some of Pickering&#39s proposals. But aside from offering the

self-employed access to the state second pension there is virtually nothing

in the proposals to induce people without pensions to start saving.

The Department for Work and Pensions has anticipated this criticism by

saying the savings gap is not as big as the ABI claims it is. The Green

Paper says: “Some methods used to quantify a &#39savings gap&#39 have serious

shortcomings. They have failed to take account of alternative ways of

saving and the various choices people make at different stages of their


It goes on to play down the problems facing Britain&#39s underpensioned by

talking up the extent of UK private pension provision in comparison with

other European countries.

But the Green Paper still concedes that there are three million people

seriously under-saving for their retirement and a further five to 10

million who will either have to work longer or pay more to have a decent

retirement, yet it is hard to find anything for new savers in the proposals.

The industry had expected the introduction of some level of incentive to

employers to offer pensions, not least because it would have breathed new

life into stakeholder

Scottish Equitable pensions development director Stewart Ritchie says: “The

biggest omission in the Green Paper is the lack of incentivisation. We keep

telling the Government that the employer contribution is key.”

Given that the review is taking place on a tax-neutral basis, the

Government review team opted to protect existing tax relief for all except

the super-rich rather than taking some relief away to give back as breaks

to encourage employers to offer pensions.

Clerical Medical pensions strategy manager Nigel Stammers says: “The tax

cost of putting incentives for employers to offer contributions obviously

proved too much for the Government. The message to the public is put money

away for a long time and you will reap a greater benefit later on but they

don&#39t want to practise what they preach.”

Providers are accusing the Government of washing their hands of the whole

issue of pension underfunding by establishing an independent commission,

headed by former CBI director general Adair Turner, to consider the current

voluntarist approach.

Ritchie says: “Setting up the independent commission is a clever move as it

postpones any difficult decisions until after the next general election.”

The Government&#39s proposals for those already in company-funded schemes or

with decent personal provision have received a far warmer reception.

Opening up the state second pension to the self-employed will be

attractive, provided that the terms are right and the simplification of the

tax rules appears to indicate that additional voluntary contributions will

be eligible for tax-free cash.

Opportunities for IFAs will be plentiful in the run-up to the introduction

of the new tax regime, expected to be in 2004/05, with a series of

deadlines for the last chance to get particular benefits.

Stammers says: “IFAs will have a whole range of sell-by dates, with

executives wanting to put more money into their Executive Pension Plans and

SSASs before the new rules come about. Increasing the annual earnings&#39 cap

for contributions to £200,000 from £97,200 will also leave a

greater margin for IFAs to operate.”

The replacement of existing annual pension contribution limits with a

single life- time limit of £1.4m has been broadly welcomed but the

detail could prove more controversial. The lifetime limit is only indexed

to retail prices, with anything over £1.4m subject to a recovery

charge of one-third of the excess, with monies taken out chargeable to

income tax on top.

Skandia pensions marketing specialist Adrian Walker says: “Facing a

possible tax of over 60 per cent of all funds over the lifetime limit means

that people will need advice about how long they run their pensions for,

how close to the lifetime limit they put money in and how they take out

their benefits.”

SSASs could lose out as the Government plans to put in a single set of

investment requirements for all pension schemes, with limits on loans too

employers and scheme members. The Inland Revenue report says: “SSASs are

not using tax breaks to help people develop secure retirement income as

they are intended.”

Momentum pensions specialist Mark Stopart says: “SSASs will be blown out of

the water. Pensioner trustees will have to find something else to do. Ssass

will be the same as self-invested personal pensions.”

With the introduction of the ability to pass on the value of annuities to

dependants up to the age of 75, flexible retirement arrangements,

simplification of contracting out, consultation on regulation of

home-reversion plans and a range of other detailed changes, IFAs will be

busy in 2003.


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