Almost two decades on from A-Day in 2006 and pensions simplification, we are firmly back in pensions complication, writes Lee Halpin

The October 2024 Budget caught everyone out. For months beforehand, planners obsessed over possible changes to tax-free cash and capital gains tax. Of the many conversations I had, only one person so much as suggested the idea that the inheritance tax (IHT) carve-out might be on the chopping block.

Understandably, nobody was seriously thinking that the government would undermine savers in that way.

But here we are. The industry has unanimously called for a change of course, a call that has fallen on deaf ears. That’s because this wasn’t a mistake or an oversight, but rather a signal.

Torsten Bell has since been unequivocal in singling out advisers for “market[ing] pensions as a way of avoiding IHT.” That’s no slip of the tongue; that’s a clear statement of intent. Barring a political earthquake, IHT on pensions is here to stay.

The advice profession (AKA you villains enabling tax avoidance) better get used to it.

Punishing prudence

However, this reform isn’t really squeezing the super-rich; it’s dragging ordinary defined contribution savers into the IHT net.

These are not high-net-worth individuals, but people who’ve done exactly what governments told them to do for decades: save diligently, shoulder the risks of market performance and longevity, and reduce their dependence on the state.

Now, especially when considered in context of the sums now needed to support an adequate retirement, they discover that the “prize” might be a future IHT bill for their families.

Worse still, if someone dies before 55 without ever drawing a penny of benefit, their hard-earned savings could potentially be taxed as part of the estate.

Or consider lifetime annuities. Once purchased, they cannot be unwound – and now the goalposts may be moving in a very real way. Even the beneficiaries of the gilded defined benefit schemes are not immune. Many sacrificed benefits motivated by the flexibility around death benefits. How many would have done so if they’d known IHT would now apply?

With no political consensus, policy remains at the whim of the government of the day. How can planners advise with confidence when irreversible decisions are at stake? Ultimately, what clients were led to believe was rational, long-term decision-making might be retroactively sabotaged.

Is this what we’re calling reform?

Tumbleweeds from providers

Against this backdrop, where is the market innovation we so badly need? The silence from the big providers is deafening.

Advisers themselves are working hard to adapt. Currently, the best solution would appear to be taking regular income and gifting it as a surplus amount, avoiding the seven-year trap.

Advisers and planners are actively looking at products that can allow blended or tailored income, because as it stands, solutions that are fit for purpose need to offer the ability to regularly crystallise and draw a blend of PCLS and income – this is the amount that is gifted.

But here’s the rub: only a handful of platforms or bespoke self-invested personal pension (SIPP) providers can really deliver this solution; it requires a degree of flexibility most simply cannot accommodate.

Now, in the clamour to withdraw money from pension wrappers, drawdown propositions are under the microscope like never before. And believe me, we’ve already seen some workarounds that are less ‘innovation’, more stretching the boundaries of what’s permitted.

Advisers should beware.

From simplification to complication

So here we are – 20 years on from A-Day in 2006 and pensions simplification, we are firmly back in pensions complication.

In the end, these “reforms” don’t even capture the salient issue; that is, ensuring more members seek cost-effective advice. The regulatory and legislative demands, though, just continue to pile up, making this an increasingly unlikely direction of travel.

Shouldn’t legislation make it easier to navigate the pensions landscape, and particularly when it comes to the IHT issues I’ve discussed, to mitigate unforeseen harm to members? Instead, we’re returning, essentially, to a pre-pensions freedoms position, and worse may be to come in October – anyone for a limit imposed on lifetime gifts, perchance?

We should all be crying mayday – and indeed calling for A-Day 2, right now.