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On
6 April 2006, Pension Reform takes place. The changes are introduced
by the Pensions Act 2004 under the guise of ‘Simplification’
(an oxymoron if ever there was one). |
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Let’s
be fair though, much of the complication is in the transitional
provisions so don’t be put off; the old principles will
remain unchanged. The main reason for having a pension will
still be to provide for income in retirement and the carrots
to get us to do this will still be tax relief on contributions
and tax free growth on the underlying funds. |
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The
press briefings refer to Simplicity, Security and Choice. |
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Simplicity:
Everyone will be subjected to the same set of rules.
We can’t deny this is a simplification compared to the
8 regimes being replaced, but there will still be different
types of pension that will have their own internal rules. However
the Chief Executive of a FTSE 100 company will be the big loser
because the lifetime allowance of £1,500,000 (see below)
could halve the value of his expected pot. The self employed,
on the other hand, would be hard pushed ever to reach the £1,500,000. |
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Security:
There is a whole plethora of measures designed to improve confidence
in the pension system. These are principally aimed at the Final
Salary arena and should help pensioners of companies whose schemes
are underfunded. They introduce daunting regulation on scheme
Trustees. It all sounds very expensive, but at least it is a
growth industry for graduates and school-leavers to get their
teeth into. |
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Choice:
As we all know, choice is the political Holy Grail. First
we had a choice between private or NHS dental treatment, but
then the NHS dentists packed up and went home. Then we have
a choice between two schools, but neither has room for your
child. Now there will be a choice of various options on pension
investment and style of retirement income. But getting it right
will be more luck than judgement. Pension choice will be good
for those who predict well, but will just add to the confusion
for many. |
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The
main changes affecting BlytheTax clients: |
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• We
will all have an Annual Lifetime Allowance starting at £1,500,000
(expected
to increase each year). This is the upper limit for the value
of the underlying investments (or the value of your Final Salary
benefits). If you exceed the Allowance there will be a tax charge.
Verdict:
This won’t impact too many! We prefer to target a more
realistic fund of up to £500,000.
• There
will be transitional rules for those who have already built
up
substantial value.
Verdict: This is where we will need to consider action,
but for a
relatively small number of clients. We will review all cases.
• We
will all be subject to the same constraints on our contributions.
Everyone
(including babies and non-earners) will be able to
contribute
£3,600. Those who have earnings over £3,600 can
increase
the contributions to 100% of earnings subject to a
maximum of
£215,000
per annum.
Verdict: Good this will be far more flexible than
the current
arrangements.
• We
will be able to put almost anything into our pension, perhaps
most
interestingly
residential property both here and abroad.
Verdict: Watch this space!
• We
will have greater choice on how we take our own pension
entitlement.
Verdict: Good but the choice will be complex and reliant
upon
difficult assumptions.
We like the fact that you are less likely
to lose the whole value on death.
• We
will have greater choice on how and when we take our State
Pension
entitlement.
Verdict: Good but the choice will be complex and reliant
upon
difficult assumptions
and we think that the Government may be
trying to reduce the pension burden by offering attractive looking
cash
payments.
• The
minimum retirement age will increase from 50 to 55 (with
transitional arrangements).
Verdict:
We wish!
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Plenty
to ponder but nothing to be unduly concerned about unless you
have substantial value (near or above the initial Lifetime Allowance)
in your pension. |
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