New pension transfer regulations were laid before Parliament on 24 January that will have a big impa...
New pension transfer regulations were laid before Parliament on 24 January that will have a big impact on the pension transfer market. While there is normally plenty of time to digest changes such as these, advisers have not been given this luxury this time. Due to the immediacy of the revisions, especially those affecting transfers to personal pension schemes, they impact immediately on advice.
As a result, advisers should immediately review all pending transfer cases if they wish to avoid the transfer traps that are laying in wait for those who do not get up to speed with the changes.
The amendments relating to drawdown plans are effective from 14 February, while the changes affecting occupational pension transfers do not take effect until 6 April 2001. Here, we will look at the main changes and analyse the impact they will have on the pension transfer market.
The industry has been waiting for the changes to drawdown plans for some time. This is mainly because the 'no transfer' rule that previously applied to drawdown plans meant policyholders were locked in to their plan, no matter how dissatisfied they were. In addition to this, a number of other changes have been made that should help to improve administration. These are:
l Provided the client has drawn the minimum annual income withdrawal in the current policy year of the contract, the remaining fund value can be transferred to another drawdown plan. Whole arrangements within a plan must be transferred, no tax-free cash can be paid, maximum and minimum withdrawals will be recalculated and a three-year review cycle established from the commencement date of the new drawdown plan. The impact of this change is that many clients who originally selected with-profit plans or who set up a Sipp because of the no transfer rule may now wish to look at alternatives that are more appropriate for them.
l Maximum and minimum withdrawals can be recalculated at any time in the 60 days before and including the triennial review date. Before, this had to take place on the review date. This will help in advising clients in the run up to review dates and allow some flexibility in managing changes in gilt yields and fund values during the 60-day window. It will also help to alleviate some of the difficulties phased drawdown plans have to contend with when it has not been possible to synchronise the review dates.
Although the drawdown market is big, more than £6.5bn in funds under management and roughly 50,000 plans, some fundamental changes have been made to the rules for transfers from occupational pension arrangements to personal pensions that come into play on 6 April 2001. These have more widespread significance as the changes mean that:
l Many transfers will have an incentive to take place before 6 April 2001.
l Some should wait until after 5 April 2001.
l Many cases should be revisited to see if the new rules provide any fresh incentives to transfer.
l Any transfers in the pipeline that do not take effect before 6 April 2001 will have to be re-submitted to ensure the application covers all the new transfer rules.
Under the new rules certification will be required for transfers covered by the following definitions:
l Anyone who, in any of the 10 years before the date of the proposed transfer, was a controlling director in an employment to which any part of the transfer relates.
l Anyone who was aged 45 or over and whose annual remuneration from the employment to which any part of the transfer relates exceeded the earnings cap applying in the year of transfer and in any of the six tax years preceding the proposed transfer date.
Individuals who fall within these definitions will be subject to the following rules:
l No change to the certification rules for tax-free cash.
l The 25% restriction on lump sum death benefits for non-protected rights transfers from occupational schemes will remain for those individuals still subject to certification under the new rules. Many individuals subject to current certification will fall outside of these new criteria and will have increased lump sum death benefit of all the non-protected rights available
l Although the ABI and APT are still lobbying the Treasury, the rules that require trustees of the transferring scheme to apply a maximum transfer test will alter. The main change is that the GN11 test will be replaced by the method used in pre-retirement funding tests and must use standard annuity rate factors for determining the maximum transfer permitted. These changes are likely to lead to a significant reduction in the maximum transfer amount.
Assessing clients' needs
The result of these changes is that various clients need to take a look at their position. Anyone who is likely to consider a transfer from an occupational pension scheme to a personal pension scheme in the next few years and will be subject to the maximum transfer test should review their position now. It may be possible to transfer their fund under the current rules. But this may not be possible if the transfer takes place after this date. Even if this has been previously looked at, it makes sense to revisit any such cases to see if some remuneration planning can increase the maximum transfer amount to allow the transfer to take place before the new rules bite.
Any occupational scheme member who falls outside the new certification net and stands to benefit from the improvement in lump sum death benefits should look at whether the new rules provide an incentive to transfer to a personal pension after 5 April 2001. In the case of current transfers, this may provide an incentive to defer the transfer until after this date.
Failure to take appropriate action and defer such transfers could result in 25% of fund as a lump sum death benefit compared with the 100% of fund that could have been achieved by deferring the transfer.
Individuals who are caught by the certification rules but will fall outside the scope of the rules applying after 5 April 2001 should review the tax-free cash that will be available on transfer to a personal pension. If this is likely to improve after 6 April 2001, it will be worth delaying the transfer or revisiting past cases where a transfer did not take place to see if it will be worth transferring after the rules have altered.
The most likely categories of individuals are those who fall outside of the high earner definition and those aged over 45 when the rules have changed. Failure to defer the transfer in such cases could have a big impact on tax-free cash if the certified lump sum is less than 25% of the transfer amount.
Cases where the changes do not have the impact should still be transferred before 6 April 2001. Failure to do so will mean a new application reflecting the new rules will need to be completed and the client will miss the opportunity to buy in to the current rules for life assurance and incapacity benefits that exist until 5 April 2001
Although these changes provide lots of opportunities, care should be taken on giving the right advice over the next two months. Given the size of many transfers, any errors could prove costly – particularly so in the case of large transfers into drawdown plans. As always, investment of a little time will pay dividends. Not only will advisers avoid falling into the nasty traps that are laying in wait but they will also be better placed to take advantage of the new rules if they fully acquaint themselves with the details.
Adrian Walker is pensions communication manager at Skandia Life
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