Our industry has an unfortunate reputation for shooting itself in the foot; it delights in finding new and ingenious ways of pulling the wool over the legislators and the treasury and then explodes in fits of outraged indignity when the government retracts from certain accepted practices and understanding. We have seen this of late, with some of the so called “Pension Simplification” legislation.
The idea as I understand it, was to both simplify and relax pension rules, a laudable intent but the outcome sadly one year on from A day is anything but, as the government has sought to control an industry that has tried to turn such changes into sales opportunities, whilst at the same time going way beyond what the government intended.
Two examples for you. Firstly take the Alternative Secured Pension (ASP), this is a mechanism by which annuity purchase can be delayed after age 75 by utilising income drawdown (now called unsecured pension). The main reason the government will say that this was introduced, was to allow the “Plymouth Brethren”, a religious body who believe that annuities amount to gambling on human life because they are based on estimates of how long policyholders are likely to live …. You really can’t make it up can you! Well, within moments the industry had formulated over-enthusiastic strategies whereby pension pots for the over 75’s on death could be passed down to other family members and thereby circumnavigate Inheritance Tax, thus, the strategy of the “family SIPP” was born.
The treasury caught off balance were then deeply concerned that investors would opt for the ASP mainly because it allowed them to pass on assets when they died and predictably reacted with an inevitable clampdown to what they saw as abuse of a plan which was only intended for a few people of a certain religious belief.
The situation now, is that ASP is still available to all who are over 75 but the government watches and waits and maintains it’s position that it is still really only intended for the few and not the many!
And what of the clampdown, well there was the removal of the “death guarantee” but the change that drew most attention was the change whereby if you were to die under ASP and there are no dependants then any transfer, now called a Transfer Lump Sum Death (TLSDB) will no longer be an authorised payment and thus will be subject to an unauthorised payment tax charge of 70% and in addition an IHT levy of 40% will apply leaving a princely 18% left to be distributed.
Some would argue that this is punitive and beyond the pale but those of a different disposition may state “well something is better than nothing”. I will let you decide!
A second recent example, where industry over-enthusiasm has led to a government change of heart concerns the area of “Trivial Pensions”. It is my understanding from some reading in this area and from several very informative blogs that the government had planned to introduce simple rules when dealing with “trivial pensions”. The initial plan was that each pension scheme would be treated on its own merits. The concept was scrapped when some providers and advisers presented it as a tax planning opportunity for clients, to make payments, with tax relief, into several pension schemes and commute them all for cash. Unsurprisingly, the government clamped down on this and the final rules are as a result much more complex.
The changes involve ensuring the total pension funds for the individual are not more than 1% (currently £16,000) of the lifetime allowance (currently £1.6 million). This change is particularly regrettable, because in trying to benefit better-off pension investors, some in the industry have effectively made things much more difficult for those who will struggle to make ends meet in retirement.
We expect the government to behave responsibly in changing legislation, however, the industry must also ensure that it does not force the government’s hand by promoting ‘opportunities’ that we know it will find completely unacceptable.
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