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Pieces of eight

The long-awaited Inland Revenue paper on Pension simplification, which formed part of the Chancellor&#39s pre-Budget review, has added some flesh to the bones of the original Green Paper.

However, we are still in Limbo Land, as the Chancellor, in what appears to be an act of defiance against No 10&#39s wish to withdraw/ increase the £1.4m lifetime cap, has threatened to throw his toys out of his pram if the National Audit Office does not provide him with the answer he wants about how many people may be affected by the cap.

Thus, until Gordon Brown makes his Budget statement, we do not know whether the existing muddle of eight pension regimes will continue or be replaced by a new single regime from April 2005.

Many IFA firms are reliant upon their fee/ commission income from pension advice and, particularly in the first quarter of this year, none of us will welcome continuing uncertainty.

However, it seems that the Chancellor now agrees that he should not penalise those who have made sensible provision in the past.

It seems to me, therefore, that there is little reason for our clients not to maximise their pension contributions in the run-up to April 2005.

If their funds are in excess of £1.4m at that point in time, they can elect for primary protection or, more likely, for enhanced protection. This will remove the prospect of any excess tax being charged on their pension fund altogether, although it will mean that they will not be in a position to pay further contributions or, in the case of a defined-benefit scheme, accrue further benefits.

Clients with funds of less than £1.4m may also want to take advantage of enhanced protection if they are sufficiently close to the cap, whereby good investment returns could result in an excess tax charge being levied.

There are still several provisions in the Revenue paper which look absolutely daft, such as the idea that the lump sum death-in-service benefit should count towards the overall £1.4m limit in the event of somebody dying before drawing benefits.

This would make death-in-service schemes extremely difficult to administer as many of them will have to adopt an approach to take into account the increasing size of the individual&#39s pension fund. Surely, this is one layer of complication too far.

I would suggest also that the 20 to 1 conversion rates for pension rights from defined-benefit schemes is rather more generous to defined-benefit arrangements than for money-purchase schemes as they imply annuity rates at a much higher level than they are today. Perhaps in this case Mr Brown is protecting his own index-linked pension, which we guarantee.

In the case of annuity reform, I think it is clear to us all that while paying lip service to the need for annuity reform, the actual proposals do nothing to improve choice.

Certainly up to age 75, the proposals would make income drawdown more flexible but does Mr Brown really think that anyone is going to be interested in “alternative secured income” after the age of 75?

As the technical notes accompanying the Revenue paper appear to suggest that offshore arrangements, such as the open annuity offered by London & Colonial, would not be permitted beyond April 2005, this is certainly one area which requires major surgery to attract potential pension investors.

Planning between now and April 2005 seems to me to be relatively straight forward as we will need to concentrate on ensuring that clients take advantage of the relief available before the rules change.

However, many high-net-worth clients will be in a position where they cannot make further contributions or accrue additional benefits beyond that date.

This is perhaps no bad thing. Maybe we have had a tendency as an industry to concentrate on pension investment purely because of the tax relief available.

Clearly, pension investment is not, in itself, going to provide anything like the income that our clients will require in retirement. As a result, we will all need to work together with the product providers to develop solutions, which meet client aspirations within a tax-effective framework and which highlight the need for the IFA community to adopt a holistic approach to the financial planning needs of our clients.

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