Simplicity is seen as the solution to the crisis in confidence which
has settled on pension savings in the UK. Whether or not
simplification is the solution, only time will tell, but action is
needed now, not in the future.
The Pension Green Paper was launched with the twin aims of providing
solutions to the need for all of us to save more and work longer. The
Government wishes to encourage this. Bearing these goals in mind,
some of the changes suggested seem a little odd.
Take, for example, the proposal that after 2010 the minimum age at
which pension benefits can be accessed is to increase from 50 to 55.
How might that cause more savings to take place?
It is a theme throughout the paper that people should be able to more
easily access their pension benefits and continue to work. Raising
the minimum access age to 55 does little to help. What it does mean
is that IFAs need to ensure that new investors in pension plans are
made aware of the change. After all, if an investor discovers that he
or she cannot take expected benefits at 50, they may come back later
and complain. The fact that the minimum age might change should be
notified to clients now.
A positive aspect of this age change is that it appears to apply to
protected rights' benefits. After all, if there is to be no
distinction between benefits emerging from contributions and those
emerging from rebate payments, the current access age of 60 for the
latter will fall to 55. Presumably, this means that rebate payments
will also produce tax-free cash. If this is the case, it will mean
that the contracting-out decision is much more complex. What is the
so-called pivotal age when comparing access at 55 and tax-free cash
versus access from 65 and no tax-free cash? The Green Paper makes the
provision of advice much more difficult and puts a duty of care on
IFAs to explain these changes to their clients.
It is the delivery of simplification that is the real challenge.
There will, of course, remain the distinction between benefits built
up on a money-purchase basis and the increasingly rarer, but
desirable, defined-benefit basis. But all the terminology we are used
to might well disappear. FSAVCs, personal pensions, executive pension
plans and so on will be confined to the dustbin of history. No longer
will we need to be able to define final remuneration for a
Yet there are many contradictions. The most important way to deliver
simplification is to do away with the previous regimes. Apparently,
there are eight of these. However, mention is made of ringfencing the
benefits of these regimes so are we getting rid of eight regimes or
simply adding a ninth?
I am particularly concerned about the attack on self-invested
personal pensions and small self-administered schemes. Sipps, in
particular, are a positive and well-regulated contributor to pension
savings. They are embraced in both the US, through 401k plans, and in
Australia, through the stakeholder regime.
How many times in the run up to the introduction of stakeholder in
the UK were those countries used as a model example? They will be
forgotten in the simplification debate. The big issue seems to be the
use of these arrangements for property purchase and loans back to the
employer. Although the latter option was never allowed under Sipps,
it seems to be the held view that property purchase and leaseback and
loans to the employer are the main motives for such schemes.
Interestingly, the Green Paper also refers to loanbacks to employees,
which have never been possible for Sipps or SSASs. I am not sure who
wrote this paper but their knowledge is questionable.
The Green Paper is not legislation, it is a consultation paper. What
will come out in the form of legislation is likely to be different.
All interested parties need to get their responses in to the Revenue
and Department of Work and Pensions.
It will be politically unacceptable for simplification not to be
delivered and we should anti-cipate a Finance Act and a new Pensions
Act early in 2004. If you have clients who are likely to be affected
by the £1.4m pension fund cap, now is the time for advice rather
Nick Bamford is managing director of Informed Choice