Transfers from occupational pension schemes into personal pensions have had something of a chequered history because of the misselling review.
Perhaps for this reason, many IFAs have decided not to offer advice on transfers. Yet there are many instances where such a transfer might constitute a good choice on the part of the consumer.
The rules surrounding these transfers are complex but some good news has emerged as a result of draft regulations in the form of the Personal Pension Schemes (Transfer Payments) Regulations 2000. These propose two changes which should make transfers to personal pensions from occupational pension schemes much simpler.
Where a transfer to a personal pension takes place, it has been necessary for the transferring occupational pension scheme to provide a tax-free cash certificate where:
At the date of the transfer, the transferor is aged 45 or more, or
Is a controlling director or was such a director in the 10 years prior to the transfer, or
Is earning over the earn-ings cap at the date of the transfer, or
The transfer is from a scheme with a normal retirement date under age 45.
This certification process aims to stop the above groups achieving greater tax-free cash on transfer to a personal pension than they would have obtained from the previous scheme. In reality, this is probably one of the least common reasons for exercising a transfer.
The proposed change is that tax-free cash certificates will only now be required in respect of controlling directors or those earning more than half the earningscap (£91,800 for 2000/01).
The Inland Revenue estimates up to 96 per cent of scheme members will be able to transfer to personal pensions without any special rules being applied. Of course, benefits accrued in respect of scheme membership post-April 5, 1997 still cannot produce any tax-free cash lump sum, with this part of the transfer being treated as protected rights.
A further improvement is in death benefits. Previously, transfers for the above categ-ories have had restricted benefits payable on death where the personal pension planholder is married at the date of death. In such a situation, only 25 per cent of the non-protected-rights transfer value can be paid as a lump sum.
Under the proposed regulations, such death benefits will now be able to be paid in full as a lump sum – except for controlling directors and those earning more than half the earnings cap where the old rules will apply.
It is a shame the regulations did not go further and eliminate the old rules for all categories but at least there is some progress.
In addition, the new regulations make changes to accommodate pension sharing on divorce and to allow funds which are in drawdown to transfer to another personal pension plan provider.
Despite some commentary to the contrary, this latter change will not have a negative impact on Sipps, which are used for many more reasons than income drawdown.
The regulations also introduce a new calculation basis for checking that excessive transfer values do not take place although, again, this will only apply to controlling directors and those earning more than half the earnings cap.
On the surface, this looks like good news but some initial actuarial calculations I have seen suggest that the future allowable transfer values for controlling directors will be significantly curtailed.
For a controlling director aged 40, the new transfer value calculation (the old GN11 test) might result in as much as a 40 per cent reduction in the allowable new transfer value. This is indeed bad news and seems to suggest that obtaining a transfer value now is preferable to waiting.
The issue of draft Inland Revenue practice notes for personal pensions and stakeholder pensions, together with draft integrated model rules, now provides us with the detail we need.
All IFAs proposing to offer advice on the subject should ensure that they read these documents.