The thinnest of the thin cats will be allowed to save just as much as the fattest of the fat as we are all subject to the same lifetime allowance. This all sounds pretty egalitarian but the real-life limits that apply to thin cats have more to do with how much they have got left to invest at the end of each month than with any arbitrary limits set by pension legislation.
We have never come anywhere near taking the Government up on the full pension tax reliefs we have had available to us since 1956 and I am sure if we had done, they would have been taken away from us by now anyway. Still, on the face of it, this new approach treats everybody the same in terms of their pensions.
The same will be the case for tax-free cash sums available on retirement. After A-Day, everybody saving for a pension will be entitled to a 25% tax-free cash sum when they draw their retirement benefits and the Government’s view is that for most people this will result in an increase in tax-free cash.
I agree with this. It certainly will for those currently restricted by the £150,000 1987 rule, or caught by the 1989 Earnings Cap.
I am a bit confused by the 25% as far as ‘simplification’ is concerned though. I can see how it works with a money-purchase scheme – you’ll get a quarter of the fund as tax-free cash. But how does it work with final-salary schemes? I mean, 25% of what?
The Government points out that just doing nothing was one option open to it. Eventually, as those inhabiting the past regimes were to gradually drift into retirement, we would have been left with a single pension tax regime, the post-1989 one.
Pension schemes will also no longer need to seek approval from the Inland Revenue, but will be able to operate on the simpler basis of ‘registration’.
All existing formally approved schemes will be able to switch automatically to become registered schemes from A-Day, 6 April 2006, unless they want to become ‘unregistered schemes’. Unregistered schemes won’t be called unregistered schemes, though; they’ll be called ‘employer-financed retirement benefit schemes’, or EFRBSs for short.
Currently, in the pension argot we use, these are called Furbs and Uurbs, so that’s just another bit of the developing language we’ve all got to get our heads round. The early adopters have already started using these terms, of course, as a way of making the rest of us painfully aware that we are about nine yards off the pace.
In fact, the whole language thing looks all over the place right through the whole of the Finance Bill, with big changes to terms that have only been with us for five minutes or so. The Treasury’s own regulatory impact assessment goes on a fair bit about the fears expressed by some people regarding the widening out of investment options for small pension schemes and individual pensions, particularly the inclusion of residential property.
What this is all about is the relaxation on what we currently call Ssass and Sipps of rules restricting the investments they are allowed to make.
The single set of rules for all types of pension schemes will mean that Ssass and Sipps will be able to invest directly in residential property or works of art, for example - things previously prohibited for small schemes.
The Treasury’s judgement on this is that there are at present only 200,000 people in Ssass and Sipps and that represents just 1.3% of all the people in pension schemes, so it doesn’t think the stories of massive distortions in investment practices are credible.
They also point out that 75% of those purchasing pensions have less than £40,000 to spend on their annuity. These facts taken together seem to indicate the flow of money into residential property from pensions will be limited.
I am not too sure I agree with that. As far as I can see, everyone with a personal pension will effectively have a Sipp after 2006. I think that’s what one regime means.
In addition, anyone transferring from an occupational scheme to a personal pension will have one too. Not just that, but people without personal pensions now will be free to start one under the full concurrency rules coming in on A-Day even if they’re already in another pension scheme.
Higher-rate taxpayers doing so would only need a net contribution of £120,000 to purchase a £200,000 holiday let for example.
I am not saying everyone will behave like this, as is often suggested, but I have met plenty of people who are beginning to get pretty interested in pensions again, that’s all.
First published in Investment Week, 10 May 2004