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Is pensions simplification a real possibility?

It now seems to be an accepted fact that our pensions legislation needs to be simplified if it is to be of any earthly use to anyone. Everyone these days seems to think weíve over-egged it a tad on the complexity pedal. I suppose I should say this simplification bandwagon is very welcome, even if it has been a long time coming. I donít think itís too late in the day, but I would have preferred to have seen steps being taken fifteen years ago before it got to this stage, still...

Anyway, just because we are now finally all in agreement that our pensions environment needs to be simplified, it doesnít necessarily follow that we will end up with a simpler system. If past performance is anything to go by, I wouldnít be surprised to see another attempt to simplify things by the addition of yet further layers of complexity. This has, after all, been the preferred method of approach for the last five years or so. Indeed, it is only two years ago that the Inland Revenue issued a press release stating that plans for a radical simplification of pensions were about to be announced, something that at the time seemed too good to be true, and unfortunately was.

Criticism, I know, is easy. It is much harder to make positive suggestions. The question that is begging to be answered is, ďWhat would a simple system look like, and how would we get there from where we are now?Ē Thatís two questions really, I know, and the how do we get there bit is the really hard one. But even the first part is difficult to answer because we have no first-hand experience in the UK of simple-to-understand pensions legislation or products.

For what itís worth, and for the record, I do have a vision of what a simpler system could look like and, more importantly, how we could get there from here. I donít have the time or space to go through all of it here today, just a part. Itís perhaps best to deal with it in manageable chunks anyway, and the easiest one to start with is individual pensions.

Today we have many different forms of individual pensions available to us and they all fulfil much the same function. We have two separate legislative environments for Personal Pensions, also Retirement Annuity Policies, Additional Voluntary Contribution Schemes, Free-Standing Additional Voluntary Contribution Schemes, Stakeholder Pensions (both Chapter IV approved and Chapter 1 scheme approved with Chapter IV benefits) as well as non-concurrency and partial-concurrency rules applying. Sadly, with Einsteinís death we lost any real chance of ever fully understanding how these various exotic forms of pension interact with each other and other state and occupational regimes.

Iíve had a good idea though. Why donít we just have one individual pension option in the UK from now on and, (and this is the clever bit) insist that all holders of all existing individual arrangements switch to the new scheme asap? We could even call the new individual pension a Stakeholder Pension or something suitably inspiring. The insistence that people switch would answer the difficult Ďhow do we get from here to there?í question.

But why would people switch? Iíll tell you why; no-one would lose out and many would gain. Too good to be true? I donít think so. The new individual pension would simply have to provide all of the best features of the existing individual arrangements and have all of the restrictive and unpopular bits missing. So, we would have full concurrency, the possibility of higher tax-free cash that currently only Retirement Annuities have, no earnings cap, no benefit limits, tax-free cash on AVCs and FSAVCs etc etc etc. Is that radical or what? Iíll tell you something, it could even make pensions popular again.

Steve Bee

First published in Money Marketing, 17 January 2002