Andrew Roberts' Blog: Another short-lived pension rule unhelpful

The government has advanced its pension thinking this month with the enactment of The Finance Act 2014, guidance on allowing new retirees access to next year's pension freedoms and its response to the consultation on those freedoms. The consultation resulted in DB to DC transfers still being allowed but on an advised basis only and a new reduced annual allowance for us to get to grips with.In broad terms, the reduced allowance of £10,000 applies when people starting drawing down their pension and has been suggested as a way of stopping people paying in to a pension and drawing it out immediately as a way of saving tax and NI. {desktop}{/desktop}{mobile}{/mobile} A key part of the Government's thinking seems to be that most people will be unaffected by this unreduced annual allowance. This is based on their interpretation that 98% of pension savers over the age of 55 contribute no more than £10,000 a year, according to their consultation response paper. It's been reported since that this still means that there is some £10bn of tax at risk by people filtering their income through a pension, with the hard rules giving some credence to tactic.Whilst the Government say they will be closely monitoring behaviour, it really doesn't help anyone to have another short-lived pension rule constructed as again there has been no consideration to people changing behaviour following change of pension policy. The proposed system seems too easy for someone earning £20,000 a year to draw £10,000 of that via a pension plan from age 55. If my back of the envelope calculations are correct, this reduces tax and NI bill from £3,445 to £1,745 i.e. saving them £140 a month.Assuming the system does go ahead, we'll have to wait to see about detail such as whether carry forward is lost, or restricted, once drawdown has begun. I expect it makes sense that carry forward is lost. And presumably, those contributing over the unreduced annual allowance will have to be sent a "pension savings certificate" in the same way that those who contribute over the annual allowance do. As ever, it's important that systems reflects what is required as much as your literature does.Like the special annual allowance introduced in 2009, this reduced annual allowance also introduces a cliff edge where a single pound can make a big difference. This difference this time (£40,000 to £10,000) is not so marked as last time (£255,000 to £20,000!) but this time, a client can perhaps find themselves pushed over the edge by an administrative error. Overpaying a lump sum by £10 could be a pricey thing to fix if you have consigned a client to a lifetime of reduced pension contributions, as opposed to paying a few pounds in tax charges. {desktop}{/desktop}{mobile}{/mobile} Overpaying by such a small amount is easily possible when you consider that most clients would opt for the very maximum lump sum (no margin room for error there) and the precise valuation of someone's fund may be hard to pin down. Here's a few examples:• Does the fund include accrued bank interest and a provision for accrued fees?• Has every share portfolio been worked out strictly in line with s272 of TCGA 1992?• If allocating between members, has that allocation been tracked daily, monthly or annually? What makes sense is for there to be a practical approach by HMRC when there have been good intentions (by fit and proper scheme administrators no less) to pay a lump sum based on a fair assessment of the member's fund.Of course, even a simple sounding rule will suffer from some complexity, so let's be prepared for it but not disheartened by it. Andrew Roberts, Partner, Barnett Waddingham LLP@andrewddroberts

Andrew Roberts' Blog: Another short-lived pension rule unhelpful

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