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Block tactics

As someone who has endured the lack of technical expertise from many product providers, the latest rantings which will ultimately damage the position of our clients are to be deplored.

As someone who has enduredthe lack of technical expertise from many product providers, the latest rantings which will ultimately damage the position of our clients are to be deplored.

Norwich Union’s Iain Oliver is reported as saying that it is no coincidence that this move follows swiftly from the FSA’s warning that it will closely monitor all section 32 business and that he believes the regulator was spurred into action after seeing a number of providers market regulation changes as a driver for s32 business.

The reality is somewhat different. The changes resulted from industry representations regarding the definition of a block transfer in the Finance Act 2004.

This provides that a block transfer is a transfer of at least two members to the same scheme after A-Day.Typically, when trustees wind up occupational schemes, they will purchase individual buyouts for members.Such individual buyouts do not fall within the definition of a block transfer and members would have been disadvan-taged in these circumstances.The proposed changes remedy this situation.

But are the opponents of s32s really suggesting that this is the main market for s32s in the run-up to A-Day? I am not aware of any provider of s32s which has seriously promoted the idea of transferring members out of occupational schemes on the off chance that their scheme might wind up after A-Day with the trustees buying out the benefits in individual plans.I cannot imagine any right-thinking IFA advising clients to transfer on such grounds.

The real market is primarily directors and executives with substantial funds in executive personal pensions and s32s who have big tax-free cash entitlements that need to be protected and who may want in the future to access facilities such as self-investment, phasing and income withdrawal – precisely the sort of features not offered by Standard Life’s Stanplan.

The proposed change to the definition of a block transfer makes virtually no difference to the potential market for s32s.

What is the alternative to s32 for those who want to protect their tax-free cash entitlement and retain maximum flexibility after A-Day?

Well, it is not to transfer to PPS before A-Day with its restricted tax-free cash. A transfer to EPP usually will not offer self-investment, phasing or income withdrawal. A transfer to an SSAS will offer self-investment and income withdrawal but, for the reason mentioned below, certainly not phasing – besides, for many clients, particularly those already in s32s, a transfer to an EPP or SSAS will not be an option.

For some clients, a transfer after A-Day may well be an option.Those who can arrange to move as part of a block transfer will generally be best advised to move to a Sipp, provided its rules have been changed to allow cash of more than 25 per cent to be paid, but not everyone will be able to move as part of a block transfer.

A Sipp will offer self-investment and income withdrawal, like an Ssas, but it will not be able to offer phasing while protecting the client’s tax-free cash entitlement. Remember that the cash entitlement reverts to 25 per cent unless all benefits in the scheme are brought into payment on the same day.

Segmenting a Sipp does not solve the problem because segmentation under a Sipp is fundamentally different to clustering under an s32.Segments are individual parts of one whole, like segments of an orange.Clusters are self-contained policies (schemes after A-Day) like grapes in a bunch.You can take one grape from a bunch without exposing the other grapes to rot.Try that with an orange.Only multi-scheme arrangements permit phasing and only clustered buyouts are multi-scheme arrangements. So is phasing worthwhile? The answer must be an emphatic yes.For those who do not need all of their tax-free cash, phasing allows them to leave it in a tax-efficient environment and draw it out as and when it suits them. It offers an attractive halfway house between drawing all benefits and drawing none, in a highly tax-efficient manner. For some, after A-Day, tax efficiency will increase further as they will no longer have to draw an income along with their cash and will be allowed to provide themselves with an income consisting entirely of tax-free cash.

Standard Life’s John Lawson makes the point that, on death before all benefits have vested, the remaining fund may become subject to inheritance at 40 per cent but if it is taken out as income then, for the sorts of clients involved, the income will be taxed at 40 per cent.

Is it better to draw benefit you do not need now and suffer 40 per cent income tax or leave it in a tax-efficient environment and potentially suffer 40 per cent inheritance tax at some point in the future?

Lawson’s comments are a case of the ineffectual pursuing the indefensible. The assertion that clustered s32s will now face IHT charges on any unvested clusters in over 95 per cent of cases applies equally to personal pension phased retirement plans and even to some (vested) income withdrawal plans.Have I missed Standard’s announcement that it is withdrawing its phased retirement and income-withdrawal plans?

I am reminded of the occasion when Standard Life refused to restrict a client’s transfer value to the Appendix XI maximum to enable a transfer to PPS in spite of the fact that both the Department for Work and Pensions and Inland Revenue had confirmed that such a restriction was possible.Whose interests were Standard Life protecting in that case?

The only correct way for IFAs to advise their clients in the run-up to A-Day is to analyse each client’s individual circumstances and objectives and select the best course to meet these circumstances and objectives. There is no one-size-fits-all solution.

Far too often, providers put their own interests (and those of the Inland Revenue) ahead of their customers’ interests, prime examples being the clamour from some for the Revenue to close off the tax-free cash roll-up idea, and the constant sniping at clustered s32s from those who should know better.

The duty of IFAs and providers is to their clients and not to the Inland Revenue.

When IFAs and providers spot an opportunity to help clients it ill-behoves other providers to raising illegitimate doubts or call on the Revenue to close the opportunity off.

We need support from product providers and to find them restricting planning opportunities is just not acceptable.

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