Simplifying the taxation of pensions in the UK-do they apply locally?

As everyone awaits the pension reform guidelines from the government, last month the UK Inland Revenue issued a document entitled ‘Simplifying the taxation of pensions-Regulatory Impact Assessment’. Without going into too much detail on this report a few points are of general interest to understand how other countries are improving their systems and learning from their mistakes. Our transition to a sustainable pension system should be easier as a result of the lessons learnt from other countries. The U.K’s radical simplification of the tax rules will be achieved by replacing the six existing tax approved regimes with a single, universal, regime, and rationalising the taxation bases of the two existing unapproved regimes. This will lead to: Improved choice and flexibility for pension providers, employers and individuals saving in pensions. Improved competition among financial services firms providing pensions. Greater encouragement for individuals to save for retirement and Reduced administration and compliance costs for sponsoring employers, pension scheme administrators, providers, and advisers. The U.K government wants to encourage today’s workers, tomorrow’s pensioners, to save for their retirement and offers generous tax incentives to encourage people to save in a pension. This reform will modernise and simplify the tax rules for pensioners. The objectives are to increase individual choice and flexibility and cut industry costs by tackling the complexity and fragmentation caused by the current rules. There will be a single coherent set of rules applying to all kinds of tax-privileged pension scheme. From commencement of the simplified regime, 6 April 2006 , all future tax-privileged pension savings will follow these new rules. The Government wants to enable a gradual shift from work to retirement, thus increasing the supply of labour over employees’ lives. So, as part of the simplification package, the Government is extending flexible retirement to occupational schemes to remove the cliff-edge of retirement that the current rules impose. Under the new rules most people can make pension contributions with tax relief, up to whatever they can afford, without being bound by the contribution and/or benefit limits of the current regimes. Furthermore, an employer will now be able to make unlimited contributions to a registered pension scheme on behalf of an employee or former employee without having to check the benefits building up against any Inland Revenue limits . There will be a single set of investment rules for all pension schemes, removing a complicated set of prohibitions and restrictions for small schemes, used mainly by small businesses. It will set limits on holding shares in the sponsoring employers’ company, and loans to employers, and prohibit loans to scheme members. The new rules will allow all schemes to invest in assets, formerly barred to small schemes, such as residential property or works of art, from which members may derive a benefit. The benefits of the reform will be felt by everybody involved in pension savings and provision: • the pensions industry -sponsoring employers, scheme administrators, providers and advisers) • employers: the new rules will permit flexible retirement, helping employers retain experienced staff and allowing staff to stay on longer in work. • those employers that have previously been deterred from setting-up schemes, because of the overall cost and complexity, may now decide to do so; • members of occupational pension schemes: should, like members of personal pensions currently, have more opportunities to use their pension rights flexibly, to mix work and retirement toward the close of their careers; • pension scheme savers: will nearly all be able to save more with tax relief if they wish. They will have increased flexibility in the amount they can save and when they can save, and the potential of a more generous tax-free lump sum. • people not yet saving for a pension: will find it easier to get started as they will need less advice and face lower costs. In turn this should mean that they are unencumbered in achieving an appropriate level of pension saving for retirement. • Independent financial advisers: will need less detailed knowledge of different tax regimes, reducing their training costs. More generally, the new regime will allow for much greater flexibility over scheme design. This will mean more choice for the industry, pension scheme members and employers alike. Simpler tax rules, with lower administration and compliance costs, will be particularly helpful for small businesses. It will be easier and cheaper for employers to sponsor or contribute to a pension scheme for their employees. And, for the self-employed, the significantly more generous personal contribution limits of 100% of earnings will provide greater flexibility from year to year without the need for complex carry-back provisions. The proposed U.K.reform is intended to improve competition among financial services firms providing pensions. The complex rules of each of the current regimes, further complicated by the various regimes existing side by side, pose a significant barrier to entry for firms wanting to offer pension products. Clearly, the much debated UK pension reforms are now gathering steam. Proposals have now come to the important stage of policy implementation. Most of the points mentioned in the report could be of relevance to local authorities and act as a guide throughout the difficult task of devising a suitable and equitable new pension system. Jesmond Mizzi is Chairman of First Retirement Planning Limited and Jesmond Mizzi Financial Services Limited. Both companies are licensed by the Malta Financial Services Authority.