An extremely petulant Chancellor announced that if the National Audit Office concluded that more than 5,000 people were affected by the introduction of a lifetime allowance on pension funds, he might not bother with the introduction of pension tax simplification at all. Leaving aside such a juvenile response to a perfectly reasonable debate, what might be the impact of no change?
During the consultation phase, I must confess that I felt pension tax simplification was likely to result in a classic case of the law of unintended consequences. In seeking to make pensions simpler, in fact, the opposite would happen and one set of complex rules would be replaced by another.
To some extent, this is what is proposed. A reading of the Treasury paper published on December 10 last year quickly reveals a whole new battery of jargon and terms that the average consumer will struggle to understand. What is the difference between “primary protection” and “enhanced protection”? Which is better?
Those clients who have already accumulated significant funds and who seek to register such funds will need to understand the difference and, therefore, will probably need advice. There will be alternative methods of securing retirement income and again it is likely that advice will be required to make the best choice. So simplification does not mean advice is redundant – quite the opposite, in fact.
What is noteworthy is the Government seems to be at long last recognising the need for impartial independent advice, even if it has not quite worked out yet how it should be paid for. Witness this week's launch of Informed Choice from the Department for Work and Pensions, pointing out that if employers do not contribute to pension schemes, they may instead have to pay for employees to receive independent advice. Personally, I cannot wait for this to be implemented and, if the DWP insists on using my firm's name in its material, who am I to complain?
It will indeed be a real pity if simplification does not happen because some of the suggested changes make real sense. The removal of whole layers of rules and regulations about contribution and benefit restrictions makes great sense. I have stated before and I make no apology for repeating the fact that the acid test of simplification will be the removal of Inland Revenue guidance notes IR12 and IR76 and all the updates and rules that go with them.
But pension simplification is not just about the tax rules. In many respects, it is the interaction between personal and occupational pensions and the state pension system that causes the greatest degree of confusion. We have at long last seen the publication of the Pensions Bill, explaining exactly how the DWP intends to make things simpler in the future although there is still clearly much more to come. High on my wish list will be the ability to take benefits from protected rights at 55 and for such pension funds to provide tax-free cash lump sums. We shall see.
Introducing a single prudent set of investment rules for all schemes is to be welcomed although we do not know how much interference will come from the DWP. Remember, it is the DWP which bizarrely does not allow protected rights funds inside self-invested personal pensions. It cannot defend this by arguing that Sipps allow riskier investments when it is possible to put protected rights funds into an insured personal pension and invest in Far East funds.
The real opportunity presented by a simplified pension tax regime will be if it encourages more people to save for retirement. If simplification is simply a device to extract more tax from pension funds, I am afraid we may well have been duped again by a Chancellor whose track record for Robert Maxwell-style raids on pension funds is well recorded.
If simplification does not happen, I will still have to remember how to define final remuneration for controlling directors and I had rather hoped I might have been able to forget that.
Nick Bamford is managing director of Informed choice