The Pension proposals - at last!
There is a lot of detail in both documents but I want to concentrate here on the important aspects of the review. The revenue paper itself is fifty pages long and you can get hold of it from the links page on our Technical Central site, but if you do, rather than try to wade all the way through it just skim-read Chapters 4 and 5 and Annex B. Thatís where all the meat is. The rest of it is just padding really.
As Iím sure you know, itís not like me to be full of praise for pensions legislators unless I think they deserve it. This time they do. In my opinion the main proposals here, if implemented, would result in genuine simplification of the system and could even make pensions sexy again.
In plain English, the main proposal being made is that we should have a single tax regime for all pensions, both individual pensions and company pensions and, surprisingly, incorporating defined benefit pensions and defined contribution pensions in the same regime. Thatís pretty radical and goes a great deal further than anyone expected (Iíd have been happy with a single Defined Contribution regime!). The way this single regime is envisaged working in practice is that the Inland Revenue will value all pensions as they come into payment and that a monetary limit will be set on the maximum amount that an approved pension fund can attain. This is to be set at £1.4 million from the proposed implementation date of 2004 and will be indexed annually thereafter. So, basically it means that for most people the existing benefit limits applying to pensions will cease to have any relevance. In this way the legislation is retrospective and most people should be able to put more in to tax-efficient pensions and receive higher tax-free cash sums as well! The past benefit limits and anomalies will simply not count any more. For those people who already have retirement savings worth more than £1.4 million at the date of change, protection of their accrued rights is being proposed. The only limitation that I can see to this lifetime limit approach is that anyone adding more than £200,000 to their pension fund in any one year will be subject to tax penalties.
As far as benefits are concerned, everybody, even those in defined-benefit occupational schemes will be able to take up to 25% of their pensions pot as a tax-free cash sum at retirement, even, as I understand it, those who are currently subject to restrictions on their tax-free cash (such as previous transferees who were over age 45 at the time of transfer). This is big news indeed. It means that the previous anomalies that littered our pensions landscape would appear to have been swept away. In the same way, the three tax regimes affecting occupational schemes; the pre 1987 regime; the post 1987 - pre 1989 regime; and the post 1989 regime would also be made irrelevant by these proposed changes and that has to be good news for all of us.
To start with, it is proposed that it will still be possible for people to draw pension benefits from age 50, but that from 2010 this will be revised up to age 55. This should ensure those currently making retirement decisions will not lose out. And, crucially, because the lifetime limit is proposed to apply retrospectively, people making pensions decisions between now and the proposed 2004 start date will not lose out either. So we shouldnít see a period of uncertainty where people donít know what to do while legislation is changing. This is a fairly long-trousered approach to pensions reform too and Iím pretty pleased to see it.
The consultation on the Green Paper ends on 28th March 2003 - the consultation on the Inland Revenue ends on 11th April 2003. We will - of course - be translating these consultation documents into English well before then starting - of course - with a summary of the overall proposals tomorrow. Watch this space.
17 December 2002