The Inland Revenue is to introduce greater flexibility for people with personal pensions to switch t...
The Inland Revenue is to introduce greater flexibility for people with personal pensions to switch their funds between providers under income withdrawal from October 2000.
Under previous legislation, clients choosing income drawdown were tied to the provider they chose at the outset for the duration of the contract, with no option to switch companies if they felt charges were too high or performance too poor. Only those who chose deferred self-investment personal pension drawdown plans would have the flexibility to change providers if they wished, according to Stewart Ritchie, pensions development director at Scottish Equitable.
Deferred Sipp arrangements cost the same as personal pension drawdown, with the higher cost of the Sipp being paid only if it is activated, which occurs if the member decides to switch providers.
While most providers have built in deferred Sipp arrangements to offer this flexibility, some groups have not.
Peter Quinton, managing director of the Annuity Bureau, said the change in regulation would not necessarily have a large effect on the Sipp market because of high exit charges levied by drawdown companies.
He said: "I think the market will be restricted because many companies provided drawdown policies through with-profit schemes and there will be high charges for leaving."
Richard Taylor, National Mutual's pensions development manager, agreed the added cost of switching funds would make it unattractive to all but the most disgruntled policyholder. He said: "It should put more pressure on providers to keep their administration charges competitive but the new regulation is not going to make much difference because most drawdown providers also offer self-invested plans."
The Inland Revenue has not yet clarified whether the new legislation will apply to existing policyholders in personal pension drawdown schemes or if it will be applied only to policies starting from 1 October 2000. A spokesman stated it would be up to providers to decide how they would apply the new legislation.
Quinton said this could raise several problems on interpretation. He said: "It would make sense to let people use the flexibility on new policies but the Government cannot oblige companies to release current policyholders by law. For example, there are still a couple of life firms that refuse to release annuity holders from their contracts because they took out the policies before the open market was introduced in July 1988."
Overall, Quinton feels the Sipp drawdown market will still suit the better off but the new flexibility in income drawdown will extend the safety net for policyholders who feel they are being charged too much in their current schemes.
National Mutual charges £625 to set up a drawdown plan with a £500 annual charge from year two. There is also a £100 annual charge once the policyholder starts to draw income from the scheme.
With a self invested plan, National Mutual charges the same initial set-up fee with a £400 annual charge from year two. Transaction charges under self investment are £25.
Stockbroker Killik & Co's execution-only self-invested personal pension has no set-up fee and features online fund valuations. An annual fee of £200 in year one and £385 thereafter is applied and the fee includes investment advice.
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