Date of issue: 2nd May 2006

PENSIONS SWINGS AND ROUNDABOUTS - WHO WINS?

Sweeping changes to the pension system, which came into force on A-Day (April 6), have generally been welcomed because they allow investors far greater investment flexibility. Yet, you only have to look at the Chancellor's U-turn over residential property to realise there are bad as well as good points to the reform.

Shona Cutler, partner and personal taxation specialist at Birmingham accountants Clement Keys, says overhauling the pension system was designed to simplify the rules and promote saving, yet the Government gives with one hand and takes away with the other, so the whole issue remains something of a roller coaster ride.

Giving people the opportunity to pay large lump sums into their pensions and invest in more innovative ways is to be applauded. The Chancellor announced that investors would be able to put residential property into a Self Invested Pension Plan, then at the eleventh hour changed his mind. Meanwhile, investment in commercial property via pension funds has been made more difficult because the borrowing ability of pension funds has been dramatically reduced.

"Gordon Brown's change of heart over residential property was indicative of the Government's approach to pension reform," says Mrs Cutler.

"A lot of people had begun to make arrangements to put buy-to-let flats and holiday homes into their pensions when the rules were altered a mere 4 months before they were due to come into force. This was not enough notice, the lead time on property investment is long and residential property had been a major incentive within the legislation to encourage people to invest in pensions."

Under the new regime individuals pension contributions are no longer linked to age and salary. Investors can now pay in the equivalent of their annual earnings, up to a maximum of £215,000 for the 2006/07-tax year and a lifetime limit of £1.5m.

While this is good news, the change has created a loophole which means high earners can claim benefits designed to help those on low incomes. Someone earning a salary of £150,000 could legitimately pay £145,000 into their pension fund, bringing their income down to £5,000 for benefit purposes.

"There's sure to be legislation, possibly retrospective, to prevent this situation from continuing," says Mrs Cutler.

"We would not advocate paying more than you can comfortably afford into your pension plan and then claiming benefits, but families who are happy to pay sums into pension may wish to consider making claims for Working Family Tax Credits."

In addition the changes to the legislation mean that at the age of 75 it will no longer be necessary to buy an annuity. This is good news because it gives people the option to draw an income from their pension fund and to preserve the underlying assets of the fund which can then be passed onto dependants or future generations on death.

The recent budget has proposed that the value of our pension funds may now be classed as part of estates for Inheritance Tax and a liability may arise on death. The exact mechanics of the charge are unclear at the moment. The Chancellor has also stated that pension funds are designed to provide an income for retirement and are not meant to be a vehicle for assets to be passed to younger generations. This may be a warning of more legislation and charges to come.
"We are still examining the changes to pensions included in the new Finance Bill, but I can appreciate why people may think the rules are constantly changing thus making it impossible to carry out effective long term financial planning that pensions require.

"Inevitably there will be winners and losers as a consequence of the changes to the pension system but, with pension savings at an all time low, we need a` period of stability so that people understand the rules allowing them to plan and encourage saving for their old age."