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Simply ridiculous

With less than three months to go until April 6, advisers still cannot give confident advice on pension planning

I see that I am not going to be able to use my pension scheme to buy residential property and other exotic investments. Apart from this U-turn, is everything else now finalised and are you able to provide definitive advice as to how I should move forward with my pension planning?

To say the introduction of the new pension simplification legislation has been farcical is a gross understatement. We now have less than three months before the legislation kicks in from April 6 and are still awaiting the final regulations in several key areas.

It would appear that the annual contribution allowances and maximum lifetime limits are now set. It must be remembered that the annual contribution allowance is only the maximum amount that might attract tax relief. There will be no maximum contribution amount in future, only a maximum amount on which tax relief may be granted. Actual relief will depend on your local inspector of taxes – to whom no guidance has been issued – agreeing to the contribution under company legislation, as any other allowable expense.

Where protection is needed to preserve higher benefits or funds under the old legislation, clients will have three years to register for that protection. A very important point is that, where a client is seeking enhanced protection, not a penny more can be paid as a pension contribution after April 5. Even if a contribution is made by accident, we have been informed that the enhanced protection will be lost.

We still have no idea where we are going to be with regard to inheritance tax and pension funds. In the past, the relationship between the two has been very comfortable. However, the introduction of the ability to draw down an income after 75, along with the original intention of including residential property as a potential asset, created concern for the Paymaster General.

We await the result of the discussion process. Hopefully, the loss of residential property as an investment will mean that IHT worries will lessen. However, there is no way we can positively advise on drawdown after 75 – known as an alternatively secured pension – until the IHT issue has been finalised.

Chancellor Gordon Brown has said we will not be able to recycle tax-free cash as pension contributions. No one in the pension industry can see how this can be regulated and this brings with it the old fears of restrictions on tax-free cash in the future. It is a frightening thought but, as we have seen, the Chancellor is capable of anything.

The Department for Work and Pensions declared at the end of last year that protected rights money will be able to be held within self-invested personal pensions from April 2007. The concept that we will be able to self-invest monies paid into our pensions by the Government, which will then be available at any age with the ability to take tax-free cash and no restriction on the type of annuity, while excellent from a simplification point of view, is far more radical than many other moves. Originally, the DWP vetoed the idea of self-investing protected rights but may have been swayed by the intention to regulate Sipps from April 2007.

Other interesting twists have been identified. HM Revenue & Customs has let it be known that any company pension contributions will be treated as coming under the legislation which is in effect at the end of the trading year. This means that any company contributions made in a trading year that ends after April 6, 2006 could fall foul of the new annual contribution allowance, even though the actuarial report might well have allowed a substantial contribution.

We were already aware before the pre-Budget report that changes to the core legislation would be required and that these would be made in the 2006 Finance Act and apply retrospectively to April 6, 2006. The pre-Budget report reconfirmed this with regard to investments and how to deal with recycling tax-free cash. But this brings with it the incredible spectre that legislation introduced by the 2004 and 2005 Finance Acts, which becomes effective from April 6, 2006, will now be amended by the 2006 Finance Act. This Act will not be available until after April 2006 but will apply retrospectively to April 2006, following what will possibly be the Chancellor’s last Budget speech. Would anyone trust this man not to make further changes?

I am afraid my answer to your original question is that all we can do at present is to act with best intentions. However, I warn that anything might happen.

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