Although the government has simplified the pension regime, it's also made a few gaffes, including these six slip-ups.
Almost a year ago, saving for retirement took a huge step forward. On 6 April 2006, known as A-Day, eight different pension regimes were replaced by a single, simplified framework for retirement savings.
By removing much of the red tape choking pensions, the government has greatly improved the appeal, accessibility and flexibility of pension plans. For example, we workers can now contribute up to 100% of our pay into pensions, with tax relief available on the first £215,000 per tax year. What's more, we can contribute to as many different pensions as we wish, plus we can claim a pension from an employer while continuing to work for it. All good stuff and most welcome.
On the other hand, it's not all been plain sailing, because the Chancellor and crew at HM Treasury have also thrown a few spanners in the works over the past decade. Here are six slip-ups which have created setbacks for saving for retirement:
1. The removal of Advanced Corporation Tax (ACT) reclaim
Until 1997, pension funds could reclaim tax credits paid on the income which they received from shares, bonds and so on. However, one of Gordon Brown's first acts as Chancellor was to abolish this tax reclaim. This single act has done more damage to pension funds' finances than anything else, and has been dubbed 'the £5 billion-a-year pension tax raid'.
2. Refusing to compensate members of insolvent final-salary schemes
At least 85,000 workers have lost some or all of their supposedly guaranteed final-salary pensions when their employers went bust or pulled the rug from under ailing company schemes. Although the government has created the Financial Assistance Scheme to bail out these schemes (and the Pension Protection Fund to provide a safety net against future collapses), these cheated workers are still fighting for proper compensation through the High Court.
3. A U-turn on putting residential property into SIPPs
With a Self-Invested Personal Pension (SIPP), you choose and manage your own pension investments (with or without the help of professional advisers and investment managers). In 2005, the government announced that SIPP holders would be able to invest in residential property from A-Day onwards. However, when the government realised that a flood of wealthy investors was poised to place buy-to-let properties, holiday and second homes, and even principal private residences into SIPPs, it got cold feet and backtracked on this promise.
4. A U-turn on Alternatively Secured Pensions (ASPs)
Most pension investors use their retirement pots to buy an annuity -- an income from an insurance company which is paid until you die. However, a devout Christian group known as the Plymouth Brethren lobbied the government to introduce an alternative to annuities, which it saw as gambling with one's life and contrary to God's law.
In response, the government introduced Alternatively Secured Pensions, which allowed pensioners over 75 to generate an income from their retirement funds without being forced to buy an annuity. However, wealthy investors used this loophole as a tax dodge to enable them to pass on after death their pension assets to their family. In last December's Pre-Budget Report, the government's knee-jerk response was to impose a punitive 82% tax rate on inherited ASP funds. Ouch!
5. A U-turn on pension term insurance (PTA)
Money paid into pensions attracts tax relief, which comes in the form of an extra contribution from HM Revenue & Customs. For a basic-rate (22%) taxpayer, this relief is worth £28.21 for every £100 contributed. For a higher-rate (40%) taxpayer, additional relief of £23.08 means that this £128.21 payment costs just £76.92.
After A-Day, many pension investors began buying life insurance inside their pension funds, in order to reduce their premiums by claiming tax relief on this pension term assurance. Alas, the government decided that it didn't fancy subsidising life insurance premiums in this way, so it put a stop to PTA three months ago.
6. A restriction on recycling tax-free cash
Until the Pre-Budget Report of December 2005, it was possible for pension investors aged fifty or over to earn double tax relief on certain pension contributions. To do this, they would put, say, £20,000 into a pension fund, then immediately withdraw a quarter (£5,000) as tax-free cash. This £5,000 would be reinvested into a pension, gathering yet more tax relief. The Chancellor took objection to this 'double dipping' and introducing anti-avoidance rules at the end of 2005.
So, there you have it: six examples of government gaffes in the pension arena. Given this lack of joined-up thinking, is it any wonder that saving for retirement through pensions has become so last century? No wonder many workers prefer to put their faith in bricks and mortar through buy-to-let investing!