Ian Hill, pensions specialist at Bentley Jennison, looks at the possibilities following today's A-Day changes...
Pension legislation is about to have a radical change, but although everything centres on simplification, it is anything but simple.
The new regime was designed to achieve a number of outcomes, one of which was to apply retrospective taxes to what Government regards as excessive pension savings. Individuals and companies should by now have a strategy in place to implement the new regime, but it is concerning the numbers that have not.
Individuals can fully protect what they have already as long as they agree to leave the UK pension system for good and give up any future pension accrual.
This has, of course, given many of the senior directors of UK companies, particularly those with long service in generous final-salary schemes a bit of a headache.
As the new rules affect high-earners if they have not got their affairs in order, then they may have missed the boat. Those who did not spot what was going on will get hit.
A Lifetime Allowance, pension assets valued at £1.5 million, is the maximum size of pot the Govern-m ent will allow people to accumulate in future unless they are happy to pay tax at the rate of 55 per cent on any excess.
The funded pension assets owned by people in the UK amount to about £1,300 billion.
Many of them will be longserving employees in final-salary pension schemes who may have amassed prospective pension benefits that could be worth more than their houses.
Someone with a £600,000 house and a prospective final-salary pension of £30,000 a year may be surprised to find that their pension assets are worth the same as their home.
Simplification has not been possible, not least because of the issue of protection from retrospective taxes. Taken together, the A-Day pension changes probably amount to the most complex. In effect, all of the existing pension schemes in the UK will need to be rebuilt to conform to a new model.
One of the pension changes being brought in is that people in company pension schemes can have a personal pension at the same time.
It is called 'full concurrency'.
We'll all be able to have as many different types of pension on the go at the same time as we like. So a member of a good company pension scheme will soon be able to have a personal pension, too.
In the new post A-Day world people will be able to make much larger pension contributions, up to 100 per cent of their income if they like, every year to a maximum of £215,000.
The breaking of the link between taking tax-free cash and drawing an income will put people in control of their pension assets.
A-Day introduces the concept of unsecured pension, a way of crystallising benefits from money-purchase pension savings schemes before the age of 75. It will apply to all individual money-purchase schemes like personal pensions, stakeholder pensions free-standing additional voluntary contributions, and group money purchase occupational pension schemes where the trustees change the rules to allow people to take advantage.
Income may be taken from unsecured pension as a form of income withdrawal, but it doesn't have to be.
A short-term annuity with a maximum term of five years can also be purchased, but it has to end before 75.
If the income withdrawal route is taken, the minimum amount of income that people need to take from their designated unsecured pension funds is zero.
It effectively breaks the link between the taking of any tax-free cash entitlement and being forced to take an income at the same time.
So, someone in their fifties, say, with a money-purchase pension pot of £100,000 could designate all or some of it to be unsecured pension and get immediate access to their tax-free cash without any requirement on them to take any income.
Having fun rearranging pension assets will be the hallmark of the future - changes made to what we currently call retirement.
Getting money into personal pensions used to be a long process, unless the money was transferred from a deferred pension elsewhere. The contribution limits that existed up to A-Day made accumulating large new pension pots a slow and tedious task. After today that will no longer be the case.
A high earner, being a higherrate taxpayer, would receive £80,000 in tax relief which could all be added to their SIPP (self-invested personal pension) if they put aside £120,000 of new money. They would have £200,000 sitting in their SIPP in return for investing just £120,000. Not a bad deal.
At some point in their midsixties individuals will become entitled to their basic state pension entitlement.
They may use that to augment their occupational scheme pensions or drawings, or they may choose to defer receiving the pension in order to build up lump sum payments later on in their seventies and turn these secondary pensions into an income stream to augment their incomes during their seventies, eighties and probable nineties.
The changes coming in are not just tweaks to the system we have had up to now; they are a complete re-write.
A whole new world of advice will be required. No longer will people be collecting their gold watch at 65, and no longer will people be at work one day and putting their feet up the next.
The planning of retirement income will be a major consideration to many, but finding those who have the skill and knowledge to offer the advice needed will be another story.
