In an earlier life I was the Legal Director of the Occupational Pensions Regulatory Authority, the predecessor body to the current Pension Regulator. One of the issues which took up a considerable amount of management and investigatory time concerned a scam called ‘Pension Liberation’. It worked like this.

Gullible people desperate for cash would be encouraged to transfer out of their safe often well funded DB scheme into a ‘fake’ pension scheme, set up by the scammers. At it’s most sophisticated, they would even be given false contracts of employment so that the Inland Revenue (as it then was) would think that there was a genuine occupational scheme. For a significant fee, the ‘employee’ would then be given a cash sum out of the scheme – all totally illegal of course. The scammers had up to 50% of the transfer value, sometimes more as the admin fee, the ‘member’ got his hands on some cash but at a significant cost. And when the Revenue finally caught up with them, as they inevitably did, a massive tax penalty to boot. So most of pension savings could be lost leaving the victim ‘member’ to a very poor old age.

Prosecutions supported by OPRA at the end of the 1990’s largely put a stop to these scams, but sadly it appears that there is a new kid on the block albeit in another guise. They are called ‘Pension Reciprocation Plans’ and work by allowing people under the age of 55 to borrow up to half the value of their fund after it’s been transferred into a ‘Master Trust’ Pension Plan which – it is claimed – fall outside the legislation which would otherwise prevent members taking loans from their own scheme. Half of the funds – it’s only sold to those with a transfer value of £20,000 or more – no point going after the paupers now is it – are held in a highly risky unregulated property investment vehicle in a lax tax friendly jurisdiction such as the British Virgin Islands, the other half in a non tradeable fixed interest security. Initial fees are also high at 5% with an annual management charge of 1% and and interest rate on the loan of 5% over Bank of England Base.

As such it is not for the feint hearted and the financially unsophisticated, and while it appears to be ‘legit’ the FSA are being urged to look into these plans. If they came to me with this as a possible ‘investment’ opportunity I would not touch it with a 50 foot bargepole…and dear readers, while I am of course not authorised to give financial advice, I suggest you should think very very carefully if someone approaches you with this ‘too good to be true’ wheeze…it probably is.

To make up for the dearth of blogs over the past couple of weeks, here’s the second in two days!! Today boys and girls, we are going to talk annuities. The Government, in an effort not to let a day go by without some sort of pension announcement, are expected to call an end to the compulsory purchase of an annuity from pension savings by the age of 75.  What’s all that about then I hear you ask.

Well, as we all know, pension savings are a pretty tax efficient way of building up a fund for our retirement. They are tax free at the point of input (ie saving) but are taxed as income at the other end when we start to draw our pension. In order to ensure that HM Revenue and Customs get their fair share of your hard earned cash, you were required to buy an annuity so that you had some income to tax. An annuity is essentially an insurance policy that promises to pay you an income for life in return for a large chunk of cash when you retire. It’s a bit of a lottery really. If you buy an annuity at age 65 and sadly get run over by a bus the next day, that’s tough, the insurance company is laughing all the way to the bank since they don’t have to pay you anymore, and your family get nothing in return. Of course, if you are lucky to live until you’re 100 it’s the insurance company who may be crying since they’ve probably not gambled on you living so long and have underpriced the annuity. Swings and roundabouts though, and usually the insurers come out on top.

What the Government are now saying is this. They recognise that tying up your pension pot until retirement could be difficult for many who may wish to have access to those savings for good reasons, buying a house for instance before you become too old to enjoy it. They also recognise that many people wish to leave something for their families when they die and annuities would not allow that. However, they still want their tax take and they don’t want people to spend, spend, spend and then become dependant on the State in their old age. So people are going to be able to draw on their pension savings during their working life but there will be strict conditions attached to prevent them blowing it all on wine, women (or men) and song.

But with this flexible approach to retirement savings will come added complexity. And the reality is that for Mr and Mrs Average, an annuity will still be the right way to go. For them, it will guarantee an income in retirement. It is really only the wealthy who have other independent savings who are likely be able to take full advantage of these new rules. Reputable Financial Advisers will I hope steer away from selling unsuitable flexible lifestyle products from those who really should take the annuity option although for heavens sake, remember the Open Market Option for annuity purchase too.

Well, what a day it’s been. First, the Government has just annouced the result of its review of the way pension contributions are to be taxed, especially in relation to high earners. The previous administration had proposed an impossibly complicated way of ‘bashing the rich’ which the Coalition immediately on entering office decided to scrap. After the appropriate period of *ahem* consultation they have just announced that the previous £255,000 annual limit on tax relieved contributions is to be reduced to £50,000

In reality, this is rather better than the industry had hoped as initially, an even smaller cap of £30,000 was being mooted which could have potentially caught significantly higher numbers of people and could have had the counter productive effect of reducing the numbers saving into a pension. Before the Daily Wail starts bleating, let’s just be completely clear what this actually means. For Mr and Mrs Average, the thought that they would be able to afford to squirrel £50K a year into their pension scheme is – frankly – laughable. If we take an average annual salary of say £30K a year with a contribution rate of (say) 10% this only equates to £3000 a year. Even if matched by an employer contribution of similar amount you’d have to be going some to hit the cap.

So in fact, the only people likely to be really hit are those very high earners for whom pension saving is only a small part of their overall investment strategy. High net worth individuals will no doubt find this something of an irritation but hardly the end of the world as we know it. All in all, I think this is not a bad compromise.

And on the same day, in the Bonfire of the Quangos, it’s announced with some fanfare that the Pensions Ombudsman and the Pension Protection Fund Ombudsman are to merge. Well, stop the press. Did someone not bother to tell the Government that in reality, these two bodies are already encompassed in one organisation so there will be absolutely no saving whatsoever. What a waste of time. But the good news is that TPAS is saved. Just a pity that NEST was too!!

This week some interesting developments on the pension front and in particular the issue of a Consultation document by the Treasury on Compulsory Annuitisation by age 75. As many readers will know, the Government has already announced plans to scrap the Default Retirement Age requirements and so the need to review the requirement to purchase an annuity by age 75 when (in theory) you might still be actively working had to be on the cards.

The current tax rules were drafted on the premise that tax relief is given on the contributions going into a pension scheme on the assumption that tax will be paid on the income (or pension) derived from those contributions – that is on the benefits being paid.

Most members of Defined Contribution schemes which are of course becoming the norm with the demise of DB schemes, secure their retirement income by purchasing an annuity. If you don’t want an annuity, the options currently available to you are pretty limited. Before age 75 you can arrange for an ‘unsecured pension arrangement’ or USP from which you can take a tax free lump sum at retirement and drawdown an income from the remaining tax efficient savings pot as  needed subject to a prudent limit. After age 75 the choice is an ‘alternatively secured pension’ or ASP similar to a USP but with a lower maximum drawdown limit and a minimum drawdown limit so as to ensure that pension savings are used to provide a retirement income.

ASP’s were largely intended to be available only to those who had a moral or religious objection to annuitisation so most members of registered pension schemes are still required to purchase an annuity by age 75

The proposals aim to sweep away most of these restrictions.Annuities will still be available but won’t be compulsory at age 75. USP’s will be relaxed so that the amount of drawdown will be at the members choice subject only to a cap and members may choose not to drawdown anything at all.The Government will also create additional flexibility for individuals who wish to draw down more than the capped annual limit.

Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. This ‘Minimum Income Guarantee’ will be the most interesting (and potentially most controversial) thing to define and should make for quite a debate in the pension world.  So far, commentators are quietly impressed but this could change as we all begin to absorb the consequences and potential in this change. As ever, watch this space!

I was reading the latest edition of Saga Magazine at the weekend (look – it was lying around on my parents’ coffee table alright – I am obviously far too young to have a subscription myself!!), and began reading the main article.

It contained various interviews with some of the great of the pension and age industry about what they would like so see as the next development in legislation or societal planning.

One of the contributors was (inevitably) Ros Altmann who made a very good case for the simplification of the State Pension system in the UK – dreaming of a simple flat rate of about £140 per week. A good start perhaps but can I suggest something even more radical. A Government who would be prepared to look at the mess all their predecessors have made of the Occupational Pension Scheme regime and who would be prepared to say “Enough, it all stops here and from today the system is this and this alone…”

I leave it to other far brighter minds to come up with just what ‘this’ is going to be but a money purchase arrangement requiring a significant employer and employee contribution rate with no opt out or alternative provision may not be a bad start.

Will industry howl? Of course but the cost of making (say) a 10% basic salary contribution will still be a lot less than the current 25% average DB contribution rate and probably not much larger than they are likely paying into their own DC arrangements. And making employees contribute at least 5% does not seem to me to be all that onerous. 15% total will still not guarantee a life of luxury in retirement of course – but it’s far better than the false promise of NEST with it’s total 8% (eventually!!) and removal of a significant number of the target market from means tested benefits.

But of course, it will never happen. There are too many votes in not rocking the boat. Tinkering around the edges is far better. And the ‘just a bit too difficult’ basket just gets bigger and bigger.

Meanwhile, industry responses to the proposal to remove the compulsory retirement age in employment (and of course, potentially pension schemes) suggest universal plaudits. As we move to a DC environment (and maybe even my cunning plan above) then clearly the proposal makes sense as workers and employers can continue to pay in for as long as they wish while employment continues. But I wonder how the taxman is going to look on this whole thing. Why does the cynic in me feel that he will not want to wait another 10 years or so for his cut of the monthly pension payments? There is a large black hole in Government finances – prepare to see the end of the tax free lump sum and restrictions on tax relief on contributions going in methinks…!!

In a ‘well who’d ever have thought it…’ kind of moment, the Confederation of British Industry (CBI) has announced that according to its research, final salary schemes are the cause of more misery for companies than…well…money purchase schemes.

For those of you who find the whole thought of pensions far too depressing and confusing (and let’s face it, that’s most of the population including several pension lawyers of my acquaintance!!) let me try and give a short guide to the difference.

A final salary scheme (sometimes called ‘defined benefit’) promises benefits based on a percentage (typically 1/60th) of final salary times the number of years of membership of a scheme. The amount of contributions paid in bear no direct relation to the pension that comes out the other end. If the pensions promised are higher than the monies in the scheme, the scheme is in deficit and the employer has to make up the shortfall.

A money purchase scheme (sometimes called ‘defined contribution’) is a WYSIWYG type of arrangement. What you see is what you get! The contributions going in are invested and what you get out in pension is the sum of those contributions plus any investment return over the years. Nothing more.

The open ended promise of a traditional DB scheme was great when times were good, the economy strong, business thriving. Indeed, things were so good that if there was too much ‘fat’ in a scheme, the tax man required schemes to reduce the surplus. Companies took ‘contribution holidays’ as there was no other legal way of getting their money back generally.

But then the economy took a nosedive, deficits grew alarmingly, the stock markets (in which a significant amount of pension scheme money was invested) tumbled and the regulatory regime got tougher. Companies found themselves in a no win situation. On the one hand, business income was falling, on the other, they were being required by law to pump more and more into the pension scheme. You can only bleed the patient so much before he turns up his toes and dies.

Unfortunately, it takes Governments a long time to realise that the Goose has ceased laying Golden eggs. On Wednesday, let’s hope the Chancellor doesn’t finally provide the coup de grace…but I suspect, he will not be able to resist just one more thrust of the tax knife into the DB scheme.

I have had some cause recently to consider the position of those fortunate enough to be earning £150,000 or more.

After putting aside all thoughts of jealousy, it began to occur to me that maybe there are some downsides to having very large…er…assets!

The Government has of course already announced a new 50% tax rate for high earners, heralding the departure from these shores of various D list celebrities for which my sympathy rating is Zero

However, recent research by yours truly – OK in reality consisting of me chatting to several very knowledgable consultants at the recent excellent Professional Pensions Show – has revealed that there are already some very highly inventive ways to allow high earners to limit payment of what to many seems a punitive rate of tax.

A great deal of talent which is of significant benefit to UK PLC and, for the more venal amongst us, tax is likely to be lost to the Treasury by those individuals ‘offshoring’ in some way. And its not only the rate of tax that’s an issue. Couple that with a gradual reduction in Personal Allowances for those with taxable incomes of £100,000 or more from April 2010 and you have for some, a marginal tax rate of 60%. No wonder foreign climes seem attractive and not just for footballers and their WAGS.

But for those who choose (or have) to stay, what options exist for them to make the most of their income? A few years ago, when pension contributions were subject to the statutory Earnings Cap, many high earners were offered membership of ‘top up’ arrangements by their employers.

These EFRBS (Employer Financed Retirement Benefit Schemes) were unapproved by the Revenue of the time. Being unapproved, they were of course outside the Cap Limits. Obviously, there was no tax relief on contributions going in, but neverthelss they provided an attractive option.

When the Earnings Cap was removed under the 2006 ‘A Day’ tax simplifications, use of these EFRBS largely fell out of favour for those high earners who were nonetheless still within the Lifetime Allowance Limits or who had claimed certain ‘protections’.

But as the Governor of California might say “they’re back!!”. Lot’s of work then on the horizon for legal advice and consultancy …maybe I might need to start worrying about foreign lands myself…and then of course, pigs might fly!!