One year on since A-Day and the Chancellor still has a firm grip on the country's economy. But is he tackling the real issues or just dipping his foot in? Edward Murray investigates
If a job is worth doing, goes the saying, then it is worth doing properly. There is no doubt that the UK pension system was in need of an overhaul, and the simplification rules brought into force on 6 April 2006 have been welcomed from most quarters.
However, there is also a feeling that, in certain areas, the rules have lacked the boldness to really simplify matters and, by continually tinkering with the original legislation, the field of play is getting boggier by the month.
If one takes a moment to consider the chancellorship of Gordon Brown, then one of its overriding features would have to be attention to detail. There has been a fastidious effort made to close every loophole in the country's financial legislation and, anywhere the rules have worked unintentionally to certain individuals' advantage, the door has been slammed shut in no time at all.
Some are happy to have such a meticulous chancellor at the helm and, certainly, no one could argue that he does not consider every aspect of his remit with total care and attention - and yet there is also a feeling that the regime has become over zealous in its desire to save the pennies and round up the pounds.
For the pension market, there was a very early sign of things to come in the Pre-Budget Report of 2005. Without ceremony, the possibility to invest in residential property, along with a number of other asset classes, was removed from the proposed simplification rules. Millions had already been spent by firms on marketing and logistical measures and, in a couple of sentences, the investment was rendered useless and the Chancellor had moved on to sticking an extra whack of duty on cigarettes and beer.
The move is symptomatic of the way the Government has hung an idea out to dry in the wind to gauge the reaction it will get and see how the proposal will work in practice.
Once it sees the idea may not be used in the way it was intended, or feels it will create a market shift that may be detrimental in unintended ways, the proposal is simply taken off the washing line and hidden away at the back of the laundry cupboard. Perhaps more research could have been done before these ideas were introduced in the first place.
Testing the water is one thing, but creating an environment of uncertainty for market practitioners is quite another, and makes it increasingly difficult for firms to put their weight into developing emerging areas, as they are never sure if the sand will shift under their feet and leave them paddling back to shore.
Knock-on effect
While the U-turn over residential property was conducted well before A-Day, it seems ramifications from the move remain in the market today. Until 6 April last year, the rules had permitted borrowing of up to 75% of the value of the commercial property. While commercial property is still a viable investment under the new regime, the maximum borrowing is restricted to 50% of the total net value of the pension fund, curtailing people's purchasing power significantly.
John Kearny, managing director at Wingham Wyatt, believes the ruling has affected a good number of clients adversely and feels it was unnecessary. There were already strict guidelines in place as to the kind of properties that could be invested in, and how they related to other properties the individual may have. Kearny says: "It worked very well. People had a pension fund and a business and they could use the business property as their pension ultimately."
Kearny believes the changes on commercial property borrowing were made in light of the proposed opportunity to buy into residential property, but when the residential policy was rescinded, nothing was done to change the new ruling over commercial borrowing. "The Government did a U-turn but did not change the rules on commercial funding," he bemoans.
Elsewhere, there have been a number of other issues that have got under the skin of many in the market, and Tom McPhail, pensions research manager at Hargreaves Lansdown, feels the rules around computation for triviality remain a problem.
He explains: "Post A-Day, you can take all over-pensions as a lump sum, as long as the aggregate value of all pension rights does not exceed £15,000."
However, under the old rules, where individual pensions were treated separately, individuals with a number of very small pensions were able to take them all as lump sums, irrespective of their total value.
McPhail believes lumping the various funds that people may have accrued over the years actually makes things more complicated than they need to be, despite the intended simplification that the new rules intended.
Many people have a number of pensions, which have been started and stopped over the years as their personal circumstances have altered, and McPhail says: "As we go forward, we are likely to see more instances of people having to annuitise with really small pots of money." This, he believes, is not really to anyone's benefit.
McPhail also has reservations about the way the Government has gone about making changes to the use of cash-free withdrawals and alternatively secured pensions (ASPs) and comments: "For ASPs, the Government was trying to come up with a solution that reconciled two fundamentally opposing philosophies of religious inclusion and compulsory annuitisation."
The resulting legislation can be put alongside the tax-free cash-recycling rules and, he adds: "People suddenly woke up to the fact that it would be possible to take lump sums out of their pension as benefits and then run round to the front door and pay it back into their pension again."
This was not what legislators had intended, and the door on such moves was firmly closed. However, McPhail believes there was little need to come down so hard on a perceived loophole that would have been used by very few anyway.
He states: "There is a slightly obsessive, slightly small-minded, slightly vindictive mindset that still exists in Government where, if it perceives the market is behaving in a manner it had not anticipated, it will take disproportionate steps to head off that market behaviour at the pass."
Nick Bladen, pension marketing manager at Skandia Life, agrees and, looking specifically at ASPs, says: "ASPs were launched on 6 April and, since then, the Government has done its best to stick a fly in the ointment and change some of the rules around them, as announced in the December Pre-Budget Report. This was a great shame given the starting point we had, and we believe there is still a market there for people who want this freedom."
Regime change
There has also been a degree of problems created in trying to marry the old regime with the new one, and the first year of matrimony has been troublesome for many. Ian Naismith, head of pensions market development at Scottish Widows, believes there are a number of areas at the periphery of the A-Day legislation where there may actually end up being test cases to set out exactly what is and is not allowed.
He says: "The transitional rules for people who had pensions before A-Day are horribly complicated and I think these could be simplified."
However, it is not all bad news and it is important to remember that many benefits have come from the rules put in place on 6 April last year.
In fact, there is no doubt the rules surrounding pensions are simpler and the set limits for both investment and draw-down make it much clearer as to what people can and cannot do. There is also a growing educational penetration in the market and individuals are slowly but surely becoming more aware of their own personal responsibilities when it comes to saving for their retirement. There is still a long way to go but things are changing, although the current environment remains difficult for individuals, as Bladen explains: "The real issue is the problem people have when it comes to saving in relation to their disposable personal income and particularly in relation to the rises taking place in the housing market."
Given the stretch being put on people's disposable incomes, it will remain difficult for the majority of individuals to put aside enough each month to see them comfortably through their retirement, and so, despite simplification to market legislation, more fundamental problems remain.
For intermediaries and providers in the market, the biggest concerns linger over continual tinkering to the rules, which may see them becoming overly prescriptive and detailed.
No one is doubting that Her Majesty's Revenue and Customs needs to be careful in its planning and determined in not being taken advantage of, however, it has to be big enough to weigh up potential loopholes and decide whether it is worth adding layer upon layer of regulation to bolt doors that very few are passing through in the first place.
It will take a good deal of time for transitional issues to iron themselves out and, as rulings are made on individual cases, this will become easier in time.
A year on since A-Day, and there are still a good many growing pains to be remedied. However, it is important not to lose sight of the huge forward step that has been taken and, Naismith concludes: "For the bulk of people, it is a winning situation."
Edward Murray is a freelance journalist
