My employer is in the process of closing down the contracted-out money-purchase scheme of which I am a member. It is being replaced with a group personal pension. It has been suggested that I transfer the fund that I have built up into the new scheme. I have been in the old scheme since January 1988. Please advise as to the options.>
Your options are as follows:
1. Refund of your contributions if you have been a member for less than two years. This can be imposed on you by your employer. You would suffer a tax charge of 15 per cent on the refund.
2. Leave the benefits where you are.
3. Transfer to a section 3buyout.
4. Transfer to the new group personal pension or an alternative personal pension.
The first option would make you forfeit your employer's contributions and should be effectively disregarded.
At first glance, the last three options would suggest that the principal considerations are the effect of charges and the performance of the pension funds. Important as these considerations are, attention should also be devoted to the impact of any possible change in the maximum benefits resulting from the transfer.
If you leave the benefits where they are or transfer them to a section 32 buyout they will be subject to Inland Revenue limits on maximum benefits when you retire. You will be entitled to a pension at your normal retirement age which is the greater of one-sixtieth of your final salary per year of service, or one thirtieth of your final salary per year of service less any retained benefits. Your final salary is restricted to £100,000 if you earn more than this or are a controlling director.
Alternatively, you could draw a tax-free cash sum three-eightieths of your final salary. If you draw a higher rate than one-sixtieth per year of service your tax-free cash can be increased proportionately. Based on 10 years service your maximum tax-free cash sum can be lifted to 36/80ths of your final salary, provided that your maximum allowable pension before commutation is 10/30ths of your final salary. Retained benefits would need to be taken into account if the higher figure is to be used and your final salary would be restricted to £100,000. If you draw the tax-free cash sum, your maximum pension would be reduced by a factor specified by the Inland Revenue.
The maximum benefits are worked out at the date when you cease to be a member of the old scheme. They can be increased in deferment by up to RPI.
You can retire early from age 50 onwards and receive a pension and tax-free cash sum based on 1/60ths and 3/80ths respectively without any reduction. Alternatively, the higher accrual rate can be used but the benefits would need to be proprtionately reduced according to the formula:
N/NS times P(or LS), where
N = Actual years of service in the scheme
NS = Prospective years of service to normal retirement
P = Maximum allowable pension
LS = Maximum allowable tax-free cash
Final salary is given a number of definitions by the Inland Revenue depending on your status – it is also specified in the scheme documents.
Benefits can be transferred to a personal pension without needing to certify that they do not exceed the Inland Revenue maxima. For controlling directors, employees aged over 45 at the date of transfer and those earning in excess of the earnings cap (in 1997/98, £84,000), the ceding scheme is required to certify the benefits.
The maximum pension that can be certified is calculated by escalating the present value of the fund to the member's normal retirement date by 3 per cent per annum. The maximum pension is the amount that could be secured by an annuity rate of £83.33 per £1,000 of pension fund less the value of any retained benefits at the date of transfer. The maximum tax-free cash sum is 2.25 times the maximum pension. These amounts can be increased in deferment by RPI.
Within a personal pension the maximum tax-free cash, even for non-certified members, is 25 per cent of the fund on retirement. This could be less than the entitlement under the original scheme. For certified members the maximum tax-free cash sum is the lesser of the certified tax-free cash or 25 per cent of the value of the fund.
This outline of the options illustrates the complexity of the choices available to you. In order to advise in more detail further information would be needed both about the scheme and your personal financial objectives.