Employees could lose up to £3bn in tax-free cash if they fail to protect their entitlement to more than 25% of their pension fund, estimates Standard Life.
From A-Day anyone taking retirement benefits will be restricted to just 25% of their total pension fund value as tax-free cash, which for many members of occupational schemes could be significantly less than their current entitlement.
In order to protect their entitlement members need to provide the pension scheme trustees with the relevant information including earnings for the 2005/06 tax year, in the case of directors it is the previous two years as well, along with the date they started work and details of any other pensions.
Standard Life says it has identified 225,000 customers who may be at risk of losing their entitlement. The company is planning to write to them from early next year in an effort to get the necessary information. The company then plans to hold the information on file in order to pay the higher lump sum when the member comes to retire.
John Lawson, head of pensions policy at Standard Life, says the provider is keen to set the tone for the rest of the market. He adds the process of protecting entitlements can mean a lot of extra work for scheme administrators and trustees, in recording details of earnings, pensionable service and other pension benefits, which could explain why some providers of Executive Pension Plans (EPPs) and Contracted In Money Purchase Schemes (CIMPs) may be reluctant to carry out the exercise.
He continues: “This is a complex issue so we’ve taken a decision to identify which of our customers are likely to need our help. This will not only affect those who are high earners, many ordinary scheme members could be at risk of losing out. For us this could affect 225,000, but across the industry the numbers are likely to be very much larger. We estimate £3bn in tax free lump sum benefits could be lost unless adequate steps are taken to protect existing entitlements.”
The announcement of its plans to protect existing customers rights comes just a day after its Third Quarter New Business Performance report, revealed a 47% drop in its individual pensions sales over the last nine months, compared to a year ago. The report also says the company is taking a selective approach to pricing new business opportunities in an effort to improve the profitability of its group pensions sector which has seen a reduction in volume.
Alasdair Buchanan, head of group communications at Scottish Life, says if the people being targeted are direct clients of Standard Life, it is their responsibility to get the information and that this is a straightforward method, but warns direct communication with customers who have financial advisers could end up confusing the issue.
He says: “The worry with this kind of approach is that by going direct you are interfering with the communication lines between IFAs and clients, where the IFAs are already likely to hold the relevant information and know their client better than the life company. As Scottish Life deals only with intermediaries we are focusing on communicating with individuals, trustees and companies through advisers rather than going direct as we don’t want to confuse the issue and create problems.”
John Gleadall, senior technical manager at Legal and General, says it is planning a similar approach to Standard Life but that the request for information will form part of a pack of documentation relating to the changes in the rules of occupational pension schemes.
He adds: “We’ll be writing to companies that run the schemes around the end of January to send out the initial documents, then we’ll do a review mid-March to request the information for entitlement protection. We are waiting till then as the data for the protection has to be correct as of the 5 April next year, so there is not much point in doing it any earlier.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
£92bn transferred since 2015
Achievements, charity work and other happy snippets
Since first announcement