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Pensions simplification four years on

Now that we’re four years on from pension simplification, have things changed much in the group life market since A Day on April 6, 2006?

Well yes and no.

The constraints of the benefit limits imposed by IR12, the vast Inland Revenue manual setting out the maximum benefits that schemes could provide, no longer applied. So there were lots of wonderful ideas on new benefit designs, as we were no longer stuck with a maximum lump sum of four times salary and a death in service pension of 4/9ths salary, or maybe an extra lump sum as an alternative. The world was our oyster, so to speak.

But in reality, it seems that people have realised that these were probably quite reasonable benefits to provide, and for whatever reason, maybe inertia, we haven’t seen significant changes in benefits.

On the other side of the coin, HM Revenue and Customs wanted to make the process of how schemes qualified for tax benefits much easier, well at least from their perspective. So instead of them having to ‘approve’ each scheme, they introduced an online system of registration.

Great we all say in the internet enabled world.

But whereas before, insurers were able to set up schemes and get them approved on behalf of their clients for stand-alone group life schemes, with this new system, they were not able to help, as only scheme administrators could register schemes.

Surely this isn’t a problem with this new simplified system, you say?

Well, no it shouldn’t be. But there are much fewer checks and balances to make sure the process is carried out correctly. Although insurers can still provide help by providing draft documentation to set up a scheme and there are plenty of instructions on how to complete the scheme set-up and registration correctly, it’s amazing how many times things aren’t done correctly.

Does this matter? Very much so. If you get it wrong, it might not be possible to pay out the benefit when an employee dies or it might mean that the benefit is subject to inheritance tax. Not really the sort of thing you’d want to face when your nearest and dearest leaves this mortal coil!

And there’s one final thing to remember. HMRC allowed 5 years for schemes to update their scheme rules to the new regime. This expires on April 5, 2011. Don’t leave it until the last minute to get your rules updated!

Canada Life sales and marketing director Paul Avis


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There is one comment at the moment, we would love to hear your opinion too.

  1. I spent the first 16 years of my career in the occupational pensions arena and the technicalities of it all were mind boggling. At the HO of the national brokerage for which I worked in the early 80’s, we had a very knowledgeable fellow whose entire working life was dedicated to keeping abreast of the never ending stream of IR12 updates, which, when you think about it, is crazy. Things never needed to be that complicated and, to a large extent, none of the successive governments ever seem to have realised that and taken any meaningful steps to address it. Labour’s Pensions Simplification of 2006 was just a ghastly bad joke that put off even more people from pensions.

    What with final salary pension schemes being now in terminal decline (except for the public sector and those run by blue chip national companies), now is a tremendous opportunity for the coalition government to fulfil its pre-election pledge to “reignite the UK savings culture”, but so far all we’ve heard about are plans to cut the maximum amount that people can put into their pension pot, cut tax relief, nothing about repealing at least some of the damage done to pensions over Labour’s 13 years in office, nothing about removing the annuity trap (which is still there even if you don’t buy an annuity because all these third way products are still shackled to GAD Rates), nothing about restoring WoP and Life Cover, nothing about repealing the tax on dividends and so and so on.

    A word to the government ~ start with a Retirement ISA under which the income which may be drawn at retirement will in any way be shackled to annuity rates (accelerated DrawDown with an insurance element against early fund burn-out).

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