12th May 2011
Pensions are never easy. Every attempt to ‘simplify' the rules and regulations surrounding pensions has failed and will continue to fail, as pensions are inherently complex beasts. This lack of simplicity is not helped by an ever changing pension rulebook.
When the new annual allowance came into force on 6 April this year, many greeted the news for a sigh of relief. Yes, at £50,000 it was significantly lower than the previous annual allowance of £255,000, but it represented a far simpler approach to restricting higher rate income tax relief than the previously suggested method of tapering relief for higher earners.
In practice, the new annual allowance is nothing but simple. Having to calculate what, if any, unused annual allowance can be carried forward from previous tax years and placing these amounts in the correct input period results in the need for expert advice before contributions can be safely calculated.
Another change on 6 April which is proving far from simple is to the income limits for Unsecured Pensions (USP) .
The introduction of a ‘flexible pension' option for USP, where investors can demonstrate a high enough level of ‘secured' pension income, was only ever going to have a niche appeal.
As attractive as the ability to make unrestricted withdrawals from your pension pot may sound, having to pay income tax on the withdrawals is a big enough deterrent for many people to leave the funds invested.
However, having the option was always nice. We have spoken to several high net worth investors who resent having their pension funds ‘locked up' and inaccessible during retirement, particularly when they feel that the money could be put to better use.
News that the Treasury is not allowing investors with index-linked annuity income to count this towards the £20,000 minimum income requirement is something of a blow; to both the dreams of those who wanted to exercise this option and to the dream of pension simplicity.
Several providers have suggested that this rule could mean thousands of investors are potentially caught up, although in reality it will matter for very few as the ‘flexible pension' option was always limited in scope.
The real issue here is another set of rushed pension rule changes which were not properly considered before being implemented. Whilst I accept that the timescale between Budget and new tax year is always incredibly tight, pensions are not something that should be constantly tweaked every year.
Considered and infrequent changes are needed to pension rules, in order to restore confidence in the system and encourage millions to save for their retirement.
Martin Bamford is a chartered financial planner at Informed Choice