Looking back at pensions in 2006, I think it was a pretty disappointing year. It started with hope and ended in resigned frustration.
When I first read the proposals contained in the Finance Act 2004 about the simplification of pensions, I simply could not believe that any Government would act in an enlightened way.
It gave us a glimpse of the promised land, where you could invest your pension in what you liked and get tax relief, contribute up to 215,000 a year or up to your taxable income, choose to pass on your pension to your family upon death, simplify the regimes from eight pension regimes to one, allow you to get tax relief on life cover and avoid the purchase of an annuity at 75.
These ideas were, of course, tempered by some negative aspects such as the lifetime limit. This smacks a bit of the green-eyed monster and I agree with Abraham Lincoln when he said: “That some should be rich shows that others may become rich and hence, it is just encouragement for industry and enterprise.”
In addition to the lifetime limit was the reduction of the borrowing permissible by a Sipp. These were the two main negative points but one could live with these because of the other positive points introduced. My cynicism has subsequently been justified by the Government’s inevitable slow retreat from the promised land of pension simplification.
First came the limiting of investment options. Residential properties were no longer allowed, together with other investments. However, it is not the fact that these exotic investments were disallowed but the manner in which they were disallowed. The industry spent a great deal of time and money gearing up for a world of carte blanche investments, only for the Chancellor to withdraw them.
It is not that I disapprove of the withdrawal of the carte blanche investment atmosphere because most of those investments would have been made by relatively few people but the impression that this withdrawal gave to the general public was avoidable. Having thrown open the possibility of carte blanche investments and created an atmosphere in which people started talking about pension investment only to then withdraw at the last minute only reinforces the cynical view that most of the public have about pensions in general.
The second U-turn is the withdrawal of pension term assurance. The reason given for this withdrawal, or rethink, is that it was being abused by people with no intention of making contributions to their pensions. A simple rule change would have sufficed. A requirement to make a minimum level of pension contributions would have got rid of the abuse.
It is U-turn three, the attack on alternatively secured pensions, that is perhaps the most damaging.
The initial proposals by the Government would suggest that it is promoting irresponsible behaviour by anyone in an Asp with a chronic condition over the age of 76. I will not go through the details but it appears that if you are in an Asp over the age of 75 and were to die, a tax charge of effectively 82 per cent would be levied on your fund. However, if you wound up your pension fund and took the whole lot as a lump sum to spend, at the age of 75, the tax charge would only be 70 per cent of your fund.
Surely, it is not the intention of the Government to promote this type of behaviour, is it?
In his Budget speeches, the Chancellor is always going on about financial stability. Clearly, this policy has not been applied to pension legislation during the term of the Government. Its U-turns do not promote confidence in pensions and has indeed made it difficult to provide pension advice. We need stability of legislation and for the Government to return to its original promise that pension legislation would provide security, simplicity, flexibility and choice.
John Winful is a partner at Winful Associates.