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Don’t stumble into any pension transfer traps

Whenever there is extensive pension transfer activity, the “c” word will inevitably be mentioned sooner or later and debate can quickly become emotive and personalised. But it is helpful to have informed discussion about which transfers are appropriate and which could be construed as churning.

The pension simplification transition rules are horribly complicated and inappropriate transfers could result from advisers misunderstand-ing the rules, rather than from any commission-related motive. It is worrying if some advisers believe they need to move all occupational scheme clients to section 32s or that there is a legislative reason for ensuring clients are in Sipps before A-Day. Transfer activity must be targeted only at those who are likely to gain from transferring.

The main reason for transferring before A-Day is to protect tax-free lump sum entitlements greater than 25 per cent. Probably over half of occupational scheme members have such an entitlement but they do not need to transfer to retain their entitlement. That should happen anyway in their existing scheme. For most, the best adv- ice may well be to stay put.

Transfers before A-Day become desirable if you would advise a transfer at some stage, anyway. For example, you may want to move a client out of a closed with-profits fund. Even there, care needs to be taken because of the potential loss of guarantees but making such a transfer before A-Day will ensure tax-free cash preservation.

Or you may feel a client needs an arrangement with more modern facilities. For example, if unsecured drawdown is likely to be attractive and the occupational scheme is unlikely to offer it, transferring to a s32 with the facility may be desirable. But are the extra facilities are of interest to the client. Is self-investment likely to prove attractive? Often, the extra facilities will be important enough to justify transfer but the FSA could look askance at advisers who suggest that all their clients are likely to self-invest.

There is then the issue of contributions after A-Day. An illogical transition rule means that, depending on what returns are achieved, you could increase or reduce your tax-free cash entitlement by paying post-A-Day contributions into your existing occupational scheme rather than a different arrangement. A s32 with the facility to pay in more at retirement, if that is beneficial, gives the required flexibility but makes sense only if any employer contribution which would be paid into the existing scheme is redirected into a replacement.

There are many reasons why a transfer before A-Day could be best advice but great care is needed to ensure the reasons for transfering are thoroughly documented and will stand up to FSA scrutiny. The sooner the transfer process starts, the better. The Revenue is digging in its heels about the possibility of flexibility for transfers that are not done and dusted by April 5, 2006 and we are likely to see a flurry of transfer activity in early 2006.

Transfers after A-Day will normally result in loss of tax-free cash protection but exceptions include block transfers and individual policies bought by trustees when a scheme winds up. Block transfers may provide an escape route but there are dangers in relying on a colleague who is happy to transfer at the same time as you. Phased retirement with tax-free cash protection will not be available if the whole transfer goes into one scheme and the issue of whether it is better to make future contributions into the receiving scheme or elsewhere becomes relevant. The may suit some clients but is not a universal panacea.

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