Sting in the tale - simply confusing
The key 'facts' that everyone is aware of seem to be that we will have one tax regime after A-day instead of the current eight regimes; people in failed schemes will be protected by the Pension Protection Fund (PPF); people who are not covered by the PPF will be bailed out by the Financial Assistance Scheme; (FAS) there will be a lifetime allowance of GBP1.5m applying to people's pension pots in future; tax-free cash will be limited to 25%; and fat cats are being kicked out of the pension system for good.
I'd say that's a fairly typical list of the certainties that exist out there, which is a bit worrying really as only the last one is true.
The number of tax regimes we have at the moment may well be eight for all I know, but the number we will have after A-day will certainly be more than one, and possibly more than eight.
The opportunities that people will have in the advice-intensive pension future to transfer between different rules and regulations will be as bewilderingly complicated as they are now. More so in my opinion.
The PPF will not come with the backing of an absolute guarantee from the government, or anyone else, and will only really protect people as long as nothing goes wrong. It will be nothing more than another pension scheme and could turn out to be just a bigger boat to go down in for those it rescues.
The FAS will offer assistance to people already at peril in the sea, but GBP400,000 shared out among an estimated 65,000 people doesn't look like much to write home about to me.
With the advent of the concept of a maximum lifetime allowance we appear to be moving from a benefit-capped approach to a simpler concept of a maximum pot we can accrue during our working lives. But the way the 'scheme pension' valuation will work for both final salary and money purchase schemes after A-day, the only function I can see for the lifetime allowance is that it will just be a way of determining the maximum benefit in a new benefit-capped tax system. The lifetime allowance of GBP1.5m in 2006 is nothing more than 20 times the maximum pension of GBP75,000 a year that will apply to those retiring in that year.
The myth that tax-free cash will be something as simple to understand as 25% of a person's pension pot falls apart when you understand the formulae contained in this years' Finance Act. Broadly speaking, people in money- purchase schemes will get more tax-free cash if they opt for worse annuities. For final salary schemes the level of tax-free cash will be dependent on the cash commutation factors applied by schemes, and the retirement age. I think the older people are when they retire from final salary schemes, the less tax-free cash will be on offer. The opposite appears to be the case for people retiring from money-purchase schemes.
Anyway, so much for the uncertainties. Even the certainties, though, are looking less certain. It is true to say that the current generation of fat cats in our pension system will face some tough choices in the run up to A- day. Many of them may well find that it will make sense for them to turn their backs on the UK pension system for good and renegotiate their pay and remuneration completely to suit their non-pensioned futures. The fact that these people are probably the decision-makers for the pension schemes the rest of us rely on is a bit worrying, and we can only hope that if the judiciary are able to break ranks with other fat cats then others may be able to do so too in the ensuing confusion.
First published in Pensions Week, 6 December 2004