An important consideration when looking at the forthcoming changes is that some of the detail requires further clarification. Many of the main principles have been set out but there are still aspects where the Inland Revenue’s stated objective of pension simplification is at odds with the effects of the legislation.
The first thing to establish is whether you should seek either primary protection or enhanced protection for your pension benefits.
As your pension fund is substantially less than 1.5m and will not reach that figure by April 6, 2006, primary protection is not available to you.
While you could select enhanced protection if your pension fund value was less than 1.5m, this would be lost if you or your employer made any further contributions to your pension. As you are still actively building up your overall pension benefits and retirement is many years away, enhanced protection is not a viable alternative.
You will be able to transfer your pension benefits from the executive pension plan to an alternative arrangement, perhaps a new employer’s scheme or an individual arrangement, after April 6, 2006. However, this may have important implications for the amount of tax-free cash that you can take as a percentage of the policy value.
At the moment, based on your service and final pensionable salary when you left service, you could take 34 per cent of your pension fund as a tax-free cash sum, with the balance required to provide pension income benefits.
After April 6, 2006 – known as A-Day – pension scheme members will be allowed to take up to 25 per cent of their pension fund as a tax-free lump sum. If their pre-A-Day allowance was greater than 25 per cent, then this is maintained and protected while in the same policy.
Tax-free cash protection does not have to be notified to the Inland Revenue, it is simply accepted. However, if you were to subsequently transfer your pension arrangement to another policy, whether another occupational pension or a personal pension arrangement, then this protection would be lost and your maximum tax-free cash would fall to 25 per cent of the fund.
There do seem to be exceptions to this rule, however. Although not appropriate in your case, if you had sought either primary protection or enhanced protection at A-Day, then on transfer the higher tax-free cash allowance would be maintained as part of the overall protection. Further, it appears that the higher tax-free cash limits are preserved if the post-A-Day transfer is part of a bulk transfer or a trustee proposed buyout.
Looking at your situation, it is therefore essential that you undertake any pension transfers or pension consolidation prior to April 6, 2006 if you wish to maintain the higher level of tax-free cash that you enjoy currently.
Aside from transfers prompted by their employers’ arrangements being wound up or terminated, two of the principal reasons why clients transfer their pension funds are:lTo seek better investment returns andIn pursuit of lower charges and more flexible terms.
You should consider pre-empting this before A-Day by reviewing your existing arrangement. The following points assume a transfer is required.
First, you would need to transfer your existing arrangement into a policy that would allow you to maintain the higher tax-free cash. This rules out personal pensions and means either an active occupational scheme or, as you are a member of your employer’s group personal pension, a section 32 policy.
Second, in pursuit of long-term investment returns and flexibility, you need to transfer to an arrangement where you can remain without transferring out for the remainder of your working life. With the likely continuing trend of market consolidation among providers, you should consider their financial strength, administration capabilities and commitment to the market.
Finally, you should concentrate on providers offering a comprehensive range of investment options. An increasing number of providers offer access to a range of externally managed funds but in some cases the range is quite limited. You do not want to find yourself in a situation in the future when in order to avoid poor fund management and limited prospects for growth you have to sacrifice your protected tax-free cash by transferring again.
You should look at four main areas – a range of basic, cost-effective, internally-managed funds with a good track record, a range of independently researched fund-of-funds options (but beware of the annual charges), a comprehensive range of externally managed funds offering a variety of investment styles, asset classes and markets and, last, a self-investment option.
Do not delay. Administration is going to be stretched to breaking point over the coming 18 months and some clients will not be able to complete transfers before A-Day.