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Old gold – Keith Popplewell

In my last article, I began to look at recent and imminent developments in the pension world. Over the next few weeks, I intend to discuss the implications for clients in all the areas undergoing change (see table below) and identify how knowledgeable financial advisers can add value to these clients.

As a starting point, in my last article I began to look at age discrimination and a UK Government amendment to an EU directive that will prevent employers from forcing employees to retire on the sole ground of age until the employee reaches 70. This is due to come into force on October 1, 2006.

I also started to discuss the proposed raising of retirement ages for public sector employees and briefly mentioned changes to the state pension – an important development which I will now discuss further.

Those reaching state pension age can defer drawing their basic state pension entitlement, which is then enhanced by around 7.5 per cent for each year of deferral. From April 2005, this rate will be expressed not as 1/7th per cent for each week of deferral, as at present, but as an effective rate of 10.4 per cent.

However, as an alternative to this deferred pension, a more important change from 2005 will permit the pensioner to exchange the deferred pension for a taxable lump sum,. This lump sum then attracts interest at 2 per cent over the Bank of England base rate.

This will undoubtedly represent an important development for many pensioners with planning needs depending on their personal tax rates, life expectancy and marital status. For example, terminally ill pensioners or others with shortened life expectancy may prefer to take the lump sum.

One can assume that advice in this area will not be forthcoming from the Government – as the clear risk is that it will be selected against within these options – and it is also fairly safe to assume that few individuals will have the knowledge, ability or inclination to make an assessment of the options properly themselves. This is a development which offers the opportunity for competent advisers to add value significantly to the lives of a large number of clients.

I would like to conclude my discussion of retirement age issues with the lack of development in the maximum age at which pension benefits can be vested.

Many pension commentators and lobbyists have been trying to encourage the Government to raise or ideally abolish the age – currently 75 – at which pension benefits must start to be taken, in particular the conversion of an accumulated money-purchase fund to buy an annuity.

Unfortunately, the Government continues steadfastly to refuse to accede to these suggestions although the Pensions Act introduces the availability of alternatively secured pensions, which will allow the scheme member to remain actively invested within his pension scheme beyond 75, drawing an income from those investments in a fairly similar way to income-drawdown contracts. This will be a welcome development which will require continuing asset allocation advice to appropriate clients.

Moreover, the Inland Revenue continues to confirm the understanding that it will be possible to pass pension funds from generation to generation following scheme members’ deaths. More about this in a later article, when I will concentrate on important aspects of the implementation of the Pensions Act.

I will now turn my attention away from age discrimination to the equally vexing issue of sex discrimination.

For over a decade (BarberGRE and so on), the impact of sex discrimination legislation has affected pensions, either directly (annuity rates on protected rights) or indirectly (the part-timers’ issue). Most recently, there has been a draft EU directive which proposes the outlawing of all forms of discrimination between the sexes – a development which would appear alm- ost certainly to signal the end of gender-based annuities.

It has been widely reported that annuity providers would welcome this development. Of course they would. One only has to look at the annuity rates offered – both to males and females – on protected rights benefits to realise that insurance companies, forced to offer the same rates to both sexes, have pitched these annuity rates almost exactly at those available to females, that is, the lowest of the two extremes.

Thus, females hoping that their annuity rates will be pitched somewhere between existing female and male annuity rates will find that are no better off than they were before the sex discrimination battle. However, males have lost out significantly. A good little earner for insurance companies.

At the time of writing, we are still awaiting final agreement on this draft directive but it appears imminent. It is believed that the UK will have no more than six years to implement the terms of the directive, meaning that financial planners will immediately be put on notice that all future annuity rates, for pension benefits vesting from, say, 2010 or thereabouts, will be offered on a unisex basis.

As we can safely assume that male annuity rates will fall, the cost of providing a defined level of pension benefit will therefore rise, leading to further costs on final-salary pension schemes and an increase in transfer values for male members of these schemes.

I am not sure that many financial advisers have anywhere near fully appreciated the importance of this directive – if it is agreed, of course – but it is an issue on which I will comment at greater length if and when details are confirmed.

Other than this directive, relatively little has changed in this respect in recent times so, with one battle already under their belts, the equal rights’ folk have turned their attention to the issue of discrimination on the grounds of sexuality. “Why,” they demand, “should pension schemes be able to discriminate between heterosexuals and homosexuals?”I have written extensively on this issue, noting in particular the case of Lisa GrantSouth West Trains, where a lesbian contested that her employer’s refusal to consider paying a dependant’s pension to a same-sex partner constituted sex discrimination.

Ms Grant lost, following an appeal which went all the way to the top in Europe, when it was realised that South West Trains also denied dependants’ pension rights to same-sex partners of male employees. Therefore, there was no discrimination on the grounds of sex as South West Trains was treating male and female homosexuals equally badly.

This case was one of the major catalysts for legislation preventing discrimination against homosexuals – an issue which was then applied to transsexuals. So where are we now and what does the future hold for these groups of people as regards pension rights?Very briefly, the Civil Partnership Act provides legal recognition for homosexual relationships and the Gender Recognition Act confirms the basis of legal rights for transsexuals.

As regards homosexuals, it might appear that pension schemes will be forced to grant a dependant’s pension benefit to a surviving same-sex partner on the same grounds as it would grant such a pension to a married heterosexual partner. My next article will identify and discuss these issues in more depth.

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