On April 6, 2006 – the day dramatically referred to by the Government as A-Day – a new and supposedly simplified pension tax regime will be introduced. From that date, all existing pension tax regimes will be replaced with one unified tax regime applying to all types of pension saving.
This is heralded by the Government as being some kind of radical reform to our highly complex pension system in the UK but I do not think that anyone who has seen the detail will seriously think that this is the case. What it will mean is a lot of work for those of us involved in advising individuals and companies on pension issues. However, without any attempt to change the crude way in which pension savings interact with the current high level of means-tested benefits on offer to pensioners, it cannot really be described as reform.
It has got more to do with rebuilding our existing pension schemes and nothing to do with putting new schemes in place for the currently unpensioned.
Every existing company pension scheme and many existing pension savers will be affected. In particular, the changes will pose problems for high earners who may find that their pension savings at A-Day are already in excess of the new maximum amount that will be permitted after that date. They may have to take prompt action to protect their existing pension holdings from tax.
This, of course, is essentially good news for financial advisers who I doubt will ever be busier. However, the timescales are very short if all the affected companies and individuals are to be properly advised.
The tax changes are being brought about by the Finance Act 2004 and will work in conjunction with the provisions of the Pensions Bill, which is expected to be enacted towards the end of this year, and other pension legislation. For that reason, it is not always going to be possible for advisers at this stage to give definitive answers to all the questions that individuals, employers and trustees will have about the new realities after A-Day. Yet I am firmly convinced that discussions about the effect of the changes should not be left until every bit of detail is known. By then, I think that there simply will not be enough time to get things done.
At this point, just 19 months away from A-Day, employers should be looking at where the pinch points are likely to be in the pension arrangements they have in place for their employees so that they can ask the right questions and focus on the problem areas they will need to sort out by April 2006. This is a compelling reason for professional financial advisers to get talking to employers about pensions straight away as a matter of urgency. A good way to approach this is to break it down into the main themes and areas of impact. I reckon there are probably five or six of these top-level issues and that itself sets a useful framework for any such discussions.
The changes will completely revise the way in which pension schemes are structured in terms of benefit and contribution limits and will radically affect the things that employers will need to do to administer their pension schemes and communicate with their members.
In addition, the changes will personally affect certain individuals in many companies who will find themselves with benefits in excess of the maxima allowed by the new laws. These people will need to take individual action, which may well trigger off complementary action by employers and trustees, first to ensure they are appraised of the options open to them before A-Day and, second, to recompense some of them for the loss of future pension accrual.
For me, the six main themes for discussions between advisers and employers would be:
Changes to scheme benefits and contributions.
Changes to the way that pension schemes will be administered.
Changes to the way that pension schemes will need to communicate with their members.
The need to inform members who are likely to be at risk of being subject to a retrospective tax on their pensions.
The provision of information on transitional protection to those members affected.
The need to renegotiate future remuneration packages for those who choose to leave pension schemes to protect the value of existing pension holdings.
The first three are really to do with getting employers thinking about the structural changes to their existing schemes, whereas the last three are aimed at ensuring that the individuals affected by these retrospective changes find out about what is happening in time to take action if they need to. This is important as, so far as I can tell, there is to be no mass-awareness campaign conducted by the Government to let UK plc know what is about to hit it on the pension front. It looks like it is going to be up to financial advisers to do that if it is going to be done at all.
Steve Bee is head of pension strategy at Scottish Life