Forestalling or Forewarning?

In difficult times, the Budget changes to higher rate pension taxation came as harsh news to many investors and advisers already struggling to find attractive investment opportunities in such a low interest rate climate.

But as well as wiping away the tax advantages for almost 300,000 people in this category, the recent updates to anti-forestalling measures are surely edging on the draconian.

Like many wealth management IFAs, the recent revelation that HMRC's new draft tax codes would provide even further restrictions was certainly not the best way to kick off the summer months.

Based on these, it now appears that 'wealthy individuals' who switch pension provider will be limited to just £20,000 in tax free contributions, regardless of payment history - and to add further confusion, it appears this also varies according to scheme types.

As it currently stands, unless investors have a regular contribution history with one provider and stick to it, they get hit for tax on any contributions over £20,000 in both the 09/10 and 10/11 tax years.

But those that do switch, possibly to do a new SIPP for example, then lose their contribution history - unless, and here is the twist, they belong to a group scheme with more than 50 members.

This is surely utter madness and will do little to help the prospects for thousands of advisers trying to encourage sensible retirement planning through SIPPS and SSASs.

And importantly, it's not just the 'wealthy' that are set to lose out from all these recent shenanigans.

From April 2011 we already know that higher earners will effectively see their pension investments slashed by 40 per cent, but isn't it also the case that this plan could have some serious and unintended consequences for the wider population. It may well be infact that those who were not intended to suffer from these changes will be the ones who stand to lose out most.

Not only will higher earners' pension contributions and retirement income be taxed at higher rates, but also employer contributions will now be taxed as a benefit in kind, which could mean an overall tax charge of more than 100% on some individual contributions.

The net effect of this then could well be that we see higher earners driven away from traditional pension schemes because of the overriding disincentives for staying put.

Based on the quite plausible assumption that these higher paid company decision makers are less likely to keep a pension scheme open if they themselves are not paying into it, the ironic knock-on effect of all this change is that it is the vast majority of employees in the sub-£150k category - the lower (average) earners - who could suffer most.

Whilst we leave the HMRC to review its changes, for many advisers and clients the need for educated and informed retirement planning continues to grow. Let's just hope the 2009 Finance Act puts an end to some of this ridiculous uncertainty.

It's hard enough for an adviser to work within the current regulatory climate and ensure all the boxes are ticked. And whilst those lucky enough to have access to specialist chartered expertise may have a more stress-free experience, for the vast majority of smaller independent firms, this dangerous period of confusion could well result in penalty and condemnation a few years down the line. But just whose fault would that be?

Chris Smallwood is chief executive of 2plan Wealth Management