Like most non-normal people Iíve read and reread the Pensions Green Paper and Inland Revenue consultation paper many times already this year. I need to get my head round them so I can do my job but I would be lying if I didnít say I find them really interesting too. The Revenue paper especially. Some of it knocked me out when I first read it and some bits of it still surprise me as I keep going over the words in my mind.
In particular, and to give you an example of what I am on about, take tax-free cash lump sums. Now, excuse me but havenít we been through a decades-old annual pre-Budget ritual where every newspaper has been required to carry worrying quotes from experts predicting the end of tax-free cash on pensions? I think youíll find we have. In fact, it was only a few weeks ago, in the run up to the publication of the Revenue paper, that this ritual was at the full height of one of its periodic frenzies. Millions of people were worried, Iím sure - unnecessarily, as it turns out.
Far from abolishing tax-free cash, the Revenue is actually proposing that many people should get more tax-free cash under the new rules than they would have done under the old ones.
Blimey, thatís a turn up for the books. No one was expecting that. Inland Revenue 1, Pension Experts 0, sort of thing. Against the run of play, some are saying, an own-goal even, sloppy back-pass, not the sort of thing the home team will be happy with.
I donít think I agree. If you read the words carefully (which is the way the Revenue guys tend to choose them in the first place) they seem to have had a road-to-Damascus moment on this.
First things first. Every self-respecting pension expert knows that we only got tax-free cash in the first place because our private pension system was based on the pension arrangements that were put in place for civil servants in the 19th Century. They had an annuity and an untaxed cash gratuity at retirement, so we all got the same.
Simple as that. Thatís the way it was and we have always worried that it would one day be seen as an anachronism that would have to be done away with. That is why the experts have all had one eye over their shoulder for so long wondering when the blow was coming. The Revenue now seems to be saying it never will, if the words used in this consultative paper are anything to go by. What they actually say is this;
Generous as tax relief is, the Government recognises that people do need encouragement to lock away their money, perhaps for decades, until they are ready to begin to draw benefits from their pension savings in later years. The tax free lump sum provides that encouragement. It can provide a substantial capital sum, perhaps allowing people to put their financial affairs in good order when they retire. It may even offer once-in-a-lifetime opportunities such as visiting family in other countries or paying for home improvements to make retirement more comfortable.
Itís difficult not to be amazed by that, isnít it? Here we have the Revenue saying there is a purpose to the tax-free cash sum after all. It is a reward to savers for locking their money up for so long a time. So, it doesnít look likely that they will be able to get rid of tax-free cash in the future, nor presumably would they even want to.
The only downside I can see to the whole thing is that personal finance journalists will have to work a bit harder in future to find a similarly compelling horror story to fill the gaps left by perennial tax-free cash shock and panic stuff. But I am sure they will come up with something suitable. People saving too much in pensions and not spending enough in the high street perhaps?
First published in Money Marketing, 20 February 2003