Is pensions simplification a pipedream?

The pensions savings marketplace could be re-energised with just a few changes to the original simplification proposals never adopted in the RIA, writes John Moret, Suffolk Life’s director of marketing.

It was probably idle curiosity – or perhaps a moment of madness – that led me to reread the Regulatory Impact Assessment (RIA) for pensions simplification when I came across this document in a cupboard a few days ago. For those unfamiliar with the document, it was the official sign-off of the cost benefit justification for pensions simplification – and it was signed by Ruth Kelly who at the time was financial secretary to the Treasury.

It was an eye-opening read from 1 April, 2004 – a date should have given us some clues on what lay ahead. It highlighted just how far we have moved from the original concept put forward in Alan Pickering’s original 2002 consultation document.

The proposed simplification involved 151 pages of primary legislation and at the time it was estimated there would be 100 pages of secondary legislation and an estimated 350 pages of guidance.

In reality, this was a huge underestimate – the anti-forestalling guidance alone last year ran to over 100 pages. The aim was laudable – to replace six existing tax regimes with a single universal regime leading to four stated aims:

• Improved choice and flexibility for providers, employers and individuals
  
• Improved competition among financial services firms
  
• Greater encouragement for individuals to save for retirement
  
• Reduced administration and compliance costs for employers, administrators, providers and advisers.
  

What a shame that four years after implementation none of these benefits have come close to being delivered.

Single set of rules

Included in the new measures was to be a single set of investment rules for all schemes, which would have allowed individuals freedom to invest in an unlimited range of assets but they would be taxed – at 40% – on any investment from which they personally derived any benefit. This, of course, opened the door to investment in residential property and some other “esoteric” investments – until the Government slammed it shut with its extraordinary last minute u-turn just four months before A-Day in April 2006.

There was to be a single set of benefit rules with two controlling tax allowances – the lifetime allowance set at £1.5m rising to £1.8m in 2010/11 and the annual contribution allowance of £215,000 rising to £255,000.

Interestingly in the RIA, the cost of tax reliefs on private pension schemes in 2002/03 was estimated at £13bn. What is more, in the RIA the costs to the Exchequer of the simplified pension regime in 2008/09 were estimated at £165m! A staggering underestimate if more recent Treasury figures published at the time of introducing restrictions on higher rate pensions tax relief are to be believed.

The new regime

In recent weeks, there have been a number of campaigns launched proposing reforms to the current tax regime for pensions and wider savings products. Most have involved a new regime built around the ISA savings model – in some cases combining that in some way with a revised pensions tax regime.

With a new government keen to reduce our financial deficit through reduced spending rather than higher taxes I am unconvinced proposals involving radical reshaping of our savings regime are needed. Instead I believe that the original Pickering proposals should be re-enacted with a few simple changes:

• A reduction in the annual allowance so that with a “reasonable” element of investment growth it would allow the lifetime allowance –currently £1.8m – to be achieved over a period of around 20 years of saving. That would suggest a limit in the region of £40-50,000 per annum;
  
• The removal of any requirement to buy an annuity – this proposal has already been adopted by the new Government. However, I would suggest the first tranche £30,000 of any pensions savings – say up to £30,000 – must be kept in “secure” investments. The balance could be drawn down at any time and would be taxed as income but with a lower rate applying where the funds are used to fund nursing home fees or other long term care needs. A universal tax charge would apply to all lump sum death benefits paid at any time – perhaps 25%.
  
• The ability to access 25% of the accumulated pensions savings at any time. Effectively, this would allow the tax-free cash element to be drawn down at any point to the extent that it has been funded. Interestingly, this proposal was adopted by the ConLibs as part of their policy for private pensions savings. Of course, this is not a new idea – I recall suggesting it in a response to a DWP consultative paper in 2001.
  

All the other changes originally proposed and are described in the RIA paper would be reinstigated. The main implication would be the reversion to the original proposal of a single set of investment rules as described above. A number of other changes that were proposed have been adopted such as the move to a minimum pension age of 55 and the new scheme registration.

Single regulator

One other change I feel would be necessary is to move to a single regulator and single set of regulations governing all types of pension provision. For too long there have been anomalies and inconsistencies in the regulatory framework governing occupational and private pension schemes. It is certainly time to have one set of rules for all defined contribution schemes be they trust or contract based.

I believe by reverting to the original simplification proposals as summarised in the RIA, with the changes outlined above, the whole pensions savings marketplace would be re-energised. Confidence in the pensions industry could be restored and pensions would once again be the rock on which long term financial security is based.

The SIPP market would clearly receive a boost – but that cannot be a bad thing as a SIPP has become an aspirational and largely untarnished brand which could be leveraged through an extension to the simplified SIPP.

The need for wholesale reform of the tax regime for savings could be avoided – with consequential cost savings – and there might even be the prospect of delivering some of the benefits listed in the RIA that have been conspicuous by their absence. Maybe the simplified SIPP need not be a pipedream.