Money Marketing article on the effects of pension tax reform ‘A-day’

by Dr. Ros Altmann

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April 6th 2006 will open up whole new vistas for pensions.  Suddenly, a pension does not need to be something that you save for every year, from early in a working career.  The annual contribution limits that people must ‘use or lose’ have been replaced by much more generous levels.  Rather than a percentage of salary at different ages, just a maximum of 100% of salary for everyone up to £215,000.  This means that a pension can become a 5 or 10 year savings plan, later in life and people can save in a different form earlier in their careers.  This has various advantages.  Firstly, individuals retain control of their money and do not need to lock it away until many years into the future.  Secondly, they may move onto higher tax rates later and then be able to get higher rate relief on all their contributions (assuming the pension incentive stays unchanged), rather than receiving only basic rate relief in the early years.  Perhaps providers could offer products which have an ISA at the beginning and then ‘graduate’ onto a pension later.  Advisers will need to advise individuals carefully also about the possibility of losing pension income in the means tested pension credit in future and, therefore, it may again be better for many people to save in an ISA, rather than a pension, because the ISA can be cashed out and spent, if too much of the pension will be lost in benefit calculations later.

There will be no need to buy an annuity any more (for large pension pots), so people will be able to keep their savings invested into later life in new types of retirement product.  Again, advisers will need to help individuals understand these options and be aware of the different tax implications.

Full concurrency gives advisers the opportunity to help individuals diversify their pension holdings, rather than relying on just one source of pension.  There will also be far more investment freedom for pension assets and Self Invested Personal  Pensions are likely to still prove popular, even though the residential property  wheeze has been removed.

Anyone over age 50 who wants a cash lump sum for special reasons, will be able to take the 25% tax free cash lump sum, while not having to actually draw a pension yet.   Reinvesting this lump sum to get further tax relief on it may seem tempting, although the Treasury has indicated it will try to prevent abuse of the system.

What A-day will not do, however, is offer new incentives for the mass market or for employers to actually contribute to pensions.  The new system will be somwhat simpler, but not simple.

Basically, there will be a new environment, with more freedom and flexibility, but it is still very complex and people will need access to good advisers to help them understand the new pensions landscape after Aday.

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