Pensions complification and the end of the lifetime allowance?
First things first. The Government decided long ago to rip up our current complex benefit-limited pension laws and replace them with a simpler system based on all of us having the same maximum pot we can put aside over our lives to buy our pensions with. We’ve had loads of consultation and literally millions of words published by the Government over the last few years to make sure retrospective legislation of this sort can be implemented in an orderly and sensible way.
The upshot of it all was that we would all be subject to a maximum pot of £1.5 million of tax-relieved pension savings after the implementation date on 6 April 2006, a day dramatically referred to as A-Day, no less. The maximum pot is designed to go up over time and we already know the Government intends it to have been raised to £1.8 million by 2010, although they’ve been a bit coy about where it’s going to go after that. They have called the maximum pot the ‘Lifetime Allowance’.
Anyone saving more than the Lifetime Allowance will be able to do so, but will get taxed at a whopping 55% if they do. My view is that this will be something of a deterrent and will stop people overdoing their pension savings in the future. Some people, though, will already be over the limit on A-Day. Their case has been successfully put and transitional arrangements will be in place so that they can avoid being hit by tax on the pension savings they have already accrued. They’ll only be able to do that if they find out about this stuff in time, but that’s another issue.
So, our benefit-limited pension system is going to be replaced by a simpler system based on a maximum ‘Lifetime Allowance’ which will apply to our pension savings. Goodbye to all the complicated and complex pension benefit limits.
Well, not quite. First we heard that people in final-salary pension schemes would be subject to a system based on a maximum pension benefit rather than a maximum pot to buy a pension with. This happened because the Government decided that final-salary pensions could be ‘valued’ to test them against the Lifetime Allowance using a factor of 20:1. Furthermore, that factor is able to be applied at any age. The end result is that instead of a Lifetime Allowance of £1.5 million applying, a maximum pension of £75,000 will. £75,000 is one twentieth of £1.5 million. So, in plain English the Lifetime Allowance will only be used by final-salary schemes as a way of determining the maximum allowable pension. The actual allowance will be meaningless with pensions being allowed to cost whatever they cost as long as the pension amount isn’t exceeded.
Well, that blew the idea of one regime as final-salary schemes were to be subject to a maximum pension, whereas money purchase schemes would be the only ones saddled with the idea of a maximum lifetime fund allowance. But then that changed too. Not long ago we found out that some money purchase schemes, company pension schemes where trustees could purchase what is known as a ‘scheme pension’, could also use the 20:1 factor to ‘value’ such pensions at any age too. I wrote about this at the time and you can re-read that if you like by clicking here.
It was looking increasingly like more and more people would end up in a benefit-limited system after A-Day as only those with Personal Pensions and Stakeholder Pensions would actually get caught by the maximum allowable pot thing. Now even that seems to be up for grabs, and that’s what all the press speculation has been about. One interpretation of the ‘scheme pension’ concept is that pension providers can set up ‘scheme pensions’ for people with personal pensions too and ‘value’ those at 20:1, which would leave only people in income drawdown actually subject to the Lifetime Allowance.
Now, if like me, your head’s beginning to hurt thinking about all this then just consider what it could all mean. It looks like we are getting rid of a system based on maximum emerging pension benefits and replacing it with a system based on maximum emerging pension benefits, while at the same time we’ll be claiming to have replaced it with a system based on the concept of fund values and a maximum lifetime allowance. Confused? You will be. I do hope this all gets sorted out soon so that we know what is really going on before we have to start trying to explain it all to Joe and Josephine Average. When we do, though, I don’t think we should call it Pension Simplification. Pension Complification has a nice ring to it.....
23 June 2004
This information is based on our current understanding of the Finance Bill 2004 published on 8 April 2004. This is draft legislation and may be subject to change.