Setting up a pension may not be a priority for new partners but early contributions are vital for a decent retirement pot. Chris Bryans explains how self-invested personal pensions could be the way forward




As we approach the first anniversary of A-Day, most of you will have forgotten the new pensions world that was promised then.



With the prospect of investing pension funds in fine wine, holiday homes and vintage cars, we all became more enthusiastic about our savings. As trustees, we were inundated with offers of stamp collections, yachts and rare coins, promising unbeatable returns.



It is hardly surprising that the Treasury got nervous about the prospect of people undertaking such pension scheme investments, using self-invested personal pensions (SIPPs) - and promptly did an about-turn.



This was the first of many u-turns over the last 18 months, and you could be forgiven for thinking pensions are not worth the bother. Of course, most of us already have pensions, with some ten million plans in force, and there are few alternatives to the tax advantages without higher risk.



In the new 'simplified pension regime', things should be easier to understand but this is far from the case. In addition, the swathe of new tax charges makes the job of administration much more difficult.



Under the new tax structure for pension schemes, an overall lifetime allowance for tax advantaged pension savings has been introduced, alongside annual limits on contributions. Straying above these limits means that significant tax charges are incurred.



Fortunately, there is scope for holders of existing plans to avoid some of the tax charges by registering their schemes for 'protection' with Revenue & Customs. Worryingly, few of those with schemes which need protection have taken any action to avoid the charges.



Who is affected? More people than you might think - and this is a particular issue for many established law firm partners.



While the lifetime limit is set at £1.6 million for the next tax year, this is not set to rise in line with investment returns, resulting in significant numbers of people getting caught by the 'lifetime allowance charge' in years to come. For example, a 50-year-old with an £800,000 fund today could find he is facing a tax charge at retirement with only modest excess investment growth. Similarly, a 40-year-old with a £500,000 fund could face the same issue.



This is a real problem faced by pension schemes owning commercial property, as values have rocketed in the last few years. Luckily, these scheme members can still register their funds to protect them from tax.



What do you do if you have a fund already over the lifetime allowance? This is a nice problem to have and most retired partners I have met are in this boat. In these circumstances, immediate action is essential to protect the fund from unnecessary tax.



While the deadline for applying for protection is April 2009, it can take some time to accumulate the correct information for Revenue & Customs. This is because all of a partner's pension fund details need to be included and set out as at A-Day. The pension funds must be valued on the prescribed basis: the quarter-up basis for UK equities, and on a maximum income basis for plans in drawdown. This can produce some peculiar results, with schemes valued at £800,000 appearing to have an A-Day value of £2 million.



Clearly, individual advice is important if you have pension funds of any reasonable value, and taking action early enough to get the information in good time is important. It might seem as though there is lots of time, but when you start looking for details of that pension plan from the time you were briefly employed, you start to realise the size of the task.



What if you do not have a sizeable pension already? One of the positive aspects of the new rules is the introduction of sensible annual contribution limits, which can allow some partners to pay up to the lifetime allowance (£1.6 million, 2007/08) in one tax year. In practice though, for most people the limit will be something over £200,000 - as long as their earnings are at least this amount.



It is often difficult to convince newly promoted partners to consider pension provision in the early years. Their priority is usually work, moving home, and family. Pensions tend to come way down the list. However, this is usually the best time to consider planning as these first contributions can buy the highest proportion of any pension in retirement, by sheer virtue of the fact they will be invested for the longest time.



A key decision can be how to save with SIPPs. The market for these pensions has grown tremendously. So what is the benefit for partners?



I have found the transparency in the structure to be the main attraction of SIPPs to the legal profession. Rather than the bundled or packaged products that are available from insurance companies, a SIPP provides the legal structure for the pension, a bank account, and the ability to take advice and make investment management decisions separately.



Commission payments to financial advisers, if made, have to be agreed separately, and are at the lower end of the scale. They generally compare favourably with those in the stakeholder regime. SIPPs offer a fixed cost each year, allowing the partner to see separately what he is paying for administration, investment management, and any financial advice if this has been sought.



The flexibility in the investment management choice is considerable, allowing the appointment of an investment manager (on a discretionary or advisory basis), the appointment of a stockbroker or the use of managers to take advantage of the new residential property syndicates. Care is needed though, in the selection of your SIPP, as some are more restrictive in the choice of investment classes available.



It is better to start early and save a little often, rather than wait in the hope of a bumper year to set money aside. While there can be lots of choice and complexity, when it comes to saving it is usually better to do something rather than nothing.



Chris Bryans is head of pensions at private bank Arbuthnot Latham