Despite generous tax concessions, making payments into your own pension plan has seldom proved sufficiently attractive, even to those in the best position to contribute.
People give many reasons for why that should be. There is no doubt that the frightening complexity of the rules governing pensions in the past has been among the most important factors. Even now, many people I speak to, including quite sophisticated businessmen, are still not sure whether the changes that were introduced to the pensions regime on 6 April this year ("A-Day") are actually good news or not.
The one thing everyone does seem to remember about the new rules is that last December, the Chancellor pre-emptively ruled out allowing tax relief for those who wanted to put houses into their pensions, as was proposed earlier.
He also ruled out tax incentives for a number of other types of investments that he had previously indicated would be included, such as classic cars, fine wines, art and antiques. Hardly the best way to kick off the new A-Day regime.
In fact, for those who believe investment in residential property should be part of their pension fund, all is not lost. Since then, the Chancellor has confirmed that anyone with a self-invested personal pension (Sipp) will be allowed to hold shares in Real Estate Investment Trusts (Reits), funds that invest directly in a range of property assets. Details of the rules relating to the formation of these trusts were included in the 2006 Finance Bill.
Unfortunately, the row over the fate of residential property and Sipps has deflected attention away from the real, rather than the perceived, benefits of the new A-Day era.
What, in practice, has A-Day made possible? In my view, it has done two things that combine to make investing in pensions significantly more interesting and attractive, particularly for those willing to make their own investment decisions.
Simplification is the first real benefit. Since A-Day, the eight different types of pension plan that existed before have all been merged into one. To qualify for tax relief, payments have to be made into a "registered" scheme and meet basic contribution rules.
Crucially, these rules now apply to all types of pension plan, and not in different ways to different types of pension.
There is now no upper limit on contributions payable by a member or employer. In any one year, tax relief will be given on contributions up to 100 per cent of earnings (with an upper limit of £215,000).
The minimum retirement age at which you can start drawing a pension from your fund is 50 now, rising to 55 in 2010/11. You can withdraw income and/or capital from your pension plan even though you are still working.
Up to 25 per cent of the total pension fund can be taken as tax-free cash, at any time between retirement age and 75. There is no requirement to take any income at the same time.
An important point many have missed is that even those not earning, or earning less than £3,600 a year, are eligible to set up a plan. Where will they find the money to contribute? The rules don't say who must make the contribution - so, for example, you could pay your children's or grandchildren's contributions.
Contributions are paid net of basic-rate tax relief, so the person making the contribution pays £2,808; the Government then adds £792, bringing the total in the pension provider's hands up to £3,600. It's a rare example of something that looks too good to be true actually being worth what it looks like.
The second reason that A-Day is good news is that it has introduced much greater flexibility into how you set up and manage your pension. Despite the Chancellor's intervention last year, making more pension contributions is genuinely worth looking at, even for those who have been scared off pensions in the past for whatever reason.
The new rules ensure there is plenty of scope for catching up. If you make larger contributions, you can do so without having to give up personal control of the underlying investments.
Remember also that you can now get tax relief, not just at the basic rate, but also at higher rate, on contributions up to 100 per cent of your earnings (subject only to the upper ceiling of £215,000). That is a huge improvement on the much less flexible situation that applied before. In fact, there is nothing in the rules that says your contributions have to come from earned income; it could just as easily come from the sale of capital assets.
It is worth clarifying what tax relief on contributions actually means. For every £1,000 you pay in to a pension, another 28 per cent is added by the scheme administrators - who in turn collect the money from HM Revenue & Customs - bringing the total to £1,282. If you pay higher-rate tax, the story gets even better, because you can claim that back, too, via your self-assessment tax return. In that case, the pension fund gets £1,282 to invest and the net contribution you have made is only £769.20 (£1,000 less higher-rate tax relief of £230.80 on £1,282).
All the investments held within a registered pension plan accumulate free from both income and capital- gains tax. Plus, 25 per cent of the accumulated fund can be taken out tax-free as cash - also, when the balance is drawn out as income, it is taxed just as if your salary had continued at that level.
If you buy life assurance within a registered pension plan, you also can get what is, in effect, a discount on the cost, via tax relief at a basic- or higher-rate level. The low pre-A-Day ceiling on how much you can spend on life-assurance within your pension has now gone.
Thanks to A-Day, if you are prepared to manage your pension, the rewards could be enormous. The biggest risk is simply that future governments will change their minds about what is the biggest boost to pension investing in years.
David Wallace is a former IFA who now assists individuals in selecting and managing investments. See www.eyeswideopen.uk.com
Jonathan Davis is awayReuse content