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A cunning pension plan

You prepared a report which resulted in the court making an earmarking order against the old local authority pension scheme

owned by my client&#39s former spouse.

My client&#39s former spouse has now transferred benefits to a personal pension plan and wishes to effect income drawdown. Is this going to cause any problems?

First of all, I am amazed that anyone should wish to transfer benefits from the guaranteed inflation-linked local auth-ority scheme to a personal pension plan.

There are exceptional circumstances where this could be considered as good advice but these are rare.

I do wonder whether the transfer was intended to disrupt the earmarking order. The original court order expressly stated the local authority pension scheme in question.

The insurance company has already confirmed that all the correct procedures were adopted with regard to the transfer and the regulations complied with concerning the notification of the earmarking order.

My original report suggested an earmarking order taking into account the disparity in pension benefits accumulated by both parties.

One of the main problems with transferring to a personal pension with income drawdown is that the member himself now takes the risk and there is no absolute guarantee of what income will be payable in the future.

Your client is now at considerable risk. I understand that you have already obtained a further order preventing any transactions with regard to the pension scheme and the local authority has confirmed that it is not able to accept the transfer value back into its scheme.

We are therefore left with the situation where the former spouse has his money in a personal pension plan, wishes to take income drawdown and your client merely wishes the spirit of the original earmarking order to be fulfilled.

On the basis that there was no intention to frustrate the original order, then it would be possible for your client&#39s former spouse to make provision for a net income payment to your client of an amount equal to the original order.

Care should be taken that due regard is made of the fact that the local authority pension scheme was fully inflation-linked. However, with income drawdown, there is no guaranteed pension.

An alternative route would be for your client&#39s former spouse to purchase an inflation-linked annuity for an amount equal to that anticipated by the original order. Here, your client&#39s wishes will be met.

With regard to the lump-sum payment, as benefits have been moved from an occupational scheme to a personal pension, we have to ensure that the amount of lump-sum benefit payable by the personal pension meets the original order.

It is possible that, regardless of the order, the amount of the lump-sum payment from the personal pension could be less than that agreed in the original order. It would be up to the court to decide how to deal with that situation.

However, I am pleased to report that, in this case, no such restriction applies.

Of greater concern is the whole question of timing. Under the personal pension with income drawdown, your client&#39s former spouse can decide the timing and how much – within very wide limits – the amount of benefits will be.

There is no doubt that this facility could be used to frustrate the original order. On the basis that this is not the intention of your client&#39s former spouse, then the suggestion made above could finalise the matter.

If it is the wish of your client&#39s former spouse to frustrate the original order, it will be up to the court to decide whether the undertaking continues on to the personal pension plan.

The court will also have to decide whether your client&#39s former spouse has the ability to reduce substantially the level of income received from drawdown from his personal pension plan to thwart making any substantial payments to your client.

In recent columns, I have been expanding on my view that, increasingly, the role of financial advisers and, thus, product providers distributing through advisers, is to offer complete solutions to people&#39s financial needs rather than just products.

Last week, I began to consider how financial management groups, in particular, can play their part in making a paradigm shift towards providing wider product-related solutions.

I have talked before in this column about the ability of fund management groups to construct and provide an effective, flexible and client-centred “future fin-ancial security” programme which is focused on effective fund management.

At the heart of the programme will be the core-competence fund manage-ment capabilities of the product provider.

By marketing the full range of potential fund management wrappers from Isas through to Individual Pension Accounts, traditional and stakeholder pension wrappers and, of course, ordinary Oeics, unit trusts and investment trusts, the fund manager moves closer to being a solution provider for the IFA and the IFA&#39s clients.

The role of the IFA will be to determine not only which funds to select and manage but also which wrapper or wrappers most accurately deliver the objectives the client has expressed (hopefully in plain English) that he wishes to secure.

For example, for a client who expresses a clear objection to having to take benefits from his retirement fund in the shape of income via an annuity or drawdown, maybe an Isa or ordinary Oeic, unit trust or investment trust wrapper would be more appropriate.

At this point, it is also worth mentioning that, just as insurance companies need to ensure that their “communicators” understand how the fund-based alternatives work and how they compare on an objective basis to insurance products, so the fund management groups need to understand how insurance products work so as to understand fully their pros and cons and to accept where these products may be more appropriate for a particular client than those being delivered by the fund management group.

Looking at the Treasury&#39s document on IPAs, it seems clear that fund management groups are very much in favour currently with the authorities. No doubt, these groups will exploit this potential marketing advantage in presenting their offerings to financial advisers and the potential buying public.

However, it must be reiterated that, as for the life insurance companies, if they are to secure valued and valuable relationships with key advisers, they need to be reflecting what advisers need to do to secure valued and valuable relationships with their key clients – namely, providing complete solutions as opposed to merely delivering financial products.

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