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Critical advice

Last time I looked at how to use the S2P, targeting protected rights funds and protection benefits on pension plans as concerted campaigns to give your business a boost.

Here I will look at three slightly more technical campaigns which can provide even greater rewards: how to exploit the new transfer regulations, income drawdown in payment transfers and concurrency.

Do you have clients who previously failed the GN11 or valuation test but who may still benefit from making such a transfer? It could be second time lucky using one or more of the following options.

Wait until the test no longer applies

The new test will only apply in respect of the employment to which the transfer payment relates such as those:

•Who are, or were in the last 10 years, controlling directors at the date of transfer, and •Who are aged 45 or over and are, or were in the last six years, earning more than the current earnings cap at date of transfer.

However, an important point to remember is that for Section 32s set up prior to April 6, 2001 which are transferring to a personal pension, the old GN11 test will apply to high earners/controlling directors. This means that the client must wait 10 years from the date of the original transfer to the s32. After the 10-year period, the GN11 test will not be required.

Wait until the fund values fall

The transfer value calculated by the test is essentially fixed but fund values can and do fluctuate. Current investment market conditions could mean that the value of a member&#39s fund has decreased since the last test. Now may be a good time to rerun the test.

Wait until the client leaves service

For post-1989 members only (generally someone who joined their current scheme on or after June 1, 1989), whether the member has actually left service or not can drastically affect the test.

It is invariably better to wait until a member leaves service before transferring since, if they do this, potential service remaining to normal retirement date need not be taken into account, which will normally result in a higher maximum transfer value under the test.

Transfer to another scheme

By transferring to an s32 buy-out policy and then transferring to a personal plan at a future date (six or 10 years later as above) members may be able to transfer without restrictions if they fall outside the categories where a test is required.

If, however, the member is due to retire before the expiry date of the 10-year or six-year period, this route is no longer possible as a test will still be required all the way up to retirement.

The very same regulations that have given us the new valuation test have also introduced the provision permitting drawdown investors to transfer between drawdown providers. As we know, prior to this, transfers could not take place once drawdown had begun. This market has been slow to take off but this concession does create significant business opportunities.

One of the key benefits for a client in drawdown (apart from the obvious one of deferring an annuity purchase) is that they can benefit from flexibility over their income. However, their fund must achieve sufficient investment growth to be able to sustain the required level of income and beat the mortality drag and contract charges.

Regular reviews of each client&#39s plan are needed. Such reviews may identify that clients are invested in the wrong fund for their needs. If so, a change of provider can now be considered.

Clients, or indeed survivors, who are taking income drawdown from a personal pension and who wish to transfer their income drawdown fund to a different provider need to take into account six rules:

•The client must be under 75 and not have purchased an annuity already.

•The transfer payment consists of the whole of the funds held under the arrangement(s) being transferred.

•On transfer, the client or their survivor must choose to continue to take income withdrawals from the new provider. Remember, as this would be an ongoing drawdown arrangement, they would not be permitted to contribute further amounts into the plan, except for further transfers of income drawdown.

•On receiving the transfer, the new provider will automatically recalculate the maximum and minimum income levels. These will be produced from the Government Actuary&#39s Department tables and will be based on the member&#39s/survivor&#39s age and the current long-term gilt yield. A new triennial review period will start afresh from this date and this could open up some interesting financial planning opportunities.

•Once the transfer has been completed, the drawdown fund must remain invested with the new provider for at least one year.

•No tax-free cash may be paid from the new plan.

So now you know the rules, why should a client consider transferring from one drawdown plan to another? The best approach is to talk your clients through the main reasons why they might wish to consider a transfer and then decide if it is appropriate in their circumstances. There are a number of reasons that may make such a transfer attractive.

•Good investment returns are key to maintaining the level of required income and to replenish the gap created by mortality drag and the additional charges associated with drawdown. If a plan&#39s performance is poor, serious consideration should be given to a transfer.

•Some early income-drawdown plans had very limited investment choices with many only having with-profits funds available. Your clients could now benefit from a wider fund selection and access to external fund links.

•Continued poor administration can lead to a client&#39s lack of confidence and thus a need to consider moving to a new plan. Imagine the discomfort to clients of even one missed payment.

Advice is critical in these cases, not only on entering drawdown but also regularly reviewing the ongoing position. IFAs are ideally placed to provide this and some clients may be unhappy with the ongoing service from their existing adviser.

Early providers of income-drawdown plans may have prohibitive charging structures and clients could benefit from a move to a more modern contract with lower charges.

So when next you talk to your clients in drawdown, these are all areas that should be discussed. Now is a good time to encourage members of occupational pension arrangements who qualify for concurrency to make additional payments to personal pensions instead of AVCs – and to review those with an existing AVC arrangement.

In my fourth and final article I will concentrate on the opportunities of selling pensions to spouses, children and even pensioners.

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