The long-awaited personal pension transfer regulations have finally arrived. The majority of the provisions under the new regulations take effect from April 6 but those permitting transfers from personal pension drawdown schemes will come into force on February 14.
Clearly, for those involved in advising clients, a thorough understanding of these new rules will be essential.
Last July and November, the Inland Revenue issued two consultative documents on the new pension transfer regulations. The Sipp Provider Group was one of several trade associations that responded to the consultation process. Representing the interests of the 60 or so providers of self-invested personal pensions, it was fiercely critical of the speed at which the Revenue was planning to rush through changes which had been long awaited.
In particular, the SPG was concerned that the new assumptions for calculating transfer values did not reflect market conditions adequately, which could lead to a significant reduction in transfer values. It was also concerned about the arbitrary distinction in the treatment of taxpayers, depending solely on whether their earnings fall above or below half the earnings' cap, and inconsistencies in the treatment of death benefits following a transfer.
Encouragingly, the final version of the regulations has done away with the lower earnings' limit and reverted to the original threshold of the actual earnings' limit as part of the new test criteria. Regrettably, the Revenue has stuck to its guns on the calculation assumptions and the inconsistencies in the treatment of death benefits also remain.
According to the Revenue's paper on the regulatory impact of the new regulations, the majority of the comments it received focused on those who would be affected by the new regulations and the method of valuing the benefits to be transferred. The Revenue has taken note of the first point but it believes it would be inappropriate to use different factors for the transfer value test from those used in calculating occupational pension scheme funding controls.
However, the Revenue has agreed to reconsider this latter point at the same time as any general review of actuarial factors which might be undertaken in the future for surplus or funding purposes.
A welcome change from the previous drafts is an amendment to the definition of high-earners. The Revenue had originally intended changing this to cover anyone with earnings of more than half the earnings' cap in the last six years. However, it has accepted that this would actually increase the administrative burden and complexities for scheme administrators.
It has compromised by redefining the limit to read “the individual's annual remuneration is, or was, for any year of assessment falling (wholly or partly) during the period of six years prior to the proposed transfer date, more than the allowable maximum (that is, the earnings' cap) for the year of assessment in which the proposed transfer date falls”. The current definition covers 10 previous years.
For transfers made on or after April 6, maximum tax-free cash certificates, transfer valuation certificates and restrictions on payment of death benefits will only be required where the member has been a controlling director in the 10 years prior to the date of transfer or the member has had annual remuneration exceeding the earnings' cap for any tax year falling wholly or partly within the six years prior to the date of the transfer and is aged 45 or more at the time of transfer.
Therefore, from April 6, unlike under the current regime, there is no difference in the criteria for determining whether a tax-free cash certificate or valuation certificate is required. This is a welcome simplification.
However, irrespective of the above, if a member of an occupational pension scheme was not entitled to a tax-free lump sum, nil certificates must continue to be provided on transferring to a personal pension scheme.
Where benefits arise as a transfer from an occupational pension scheme and an individual meets the above criteria, the restriction on death benefits means 75 per cent of the fund must be used to provide an annuity or income drawdown for a surviving spouse.
There is no longer a requirement to provide dependants' annuities unless the arrangement stipulates this. This avoids the situation where the personal pension administrator might be obliged to use the full fund value for a temporary annuity for a minor child but is unable to do so because the annuity payable to the dependant is limited to that which could have been paid to the member.
The regulations on payment of death benefits are effective for members dying on or after April 6.
The remaining 25 per cent of the fund in the above circumstances is available as an cash lump sum. Where the individual falls outside the above criteria, then the full value of the fund can be paid as a lump sum unless the member had specifically requested an annuity be paid to the surviving spouse.
Tax-free cash certificates received in respect of transfers which took place before April 6 must be passed on to any new scheme to which the member subsequently transfers, so a transfer which has previously been certified cannot be made to fall under the new regulations by being transferred again.
Transfer values must still represent the whole of the arrangement being transferred out and so segmentation is still required in order to give the flexibility of partial transfers.
The new rules affecting transfers made from drawdown plans are:
transfer must comprise the whole of the funds held under any arrangement which is the subject of the transfer payment. Consequently, segmentation is still required to maximise flexibility.
The benefits transferred cannot be transferred again until a year has elapsed.
Transfers of funds in drawdown can be made into a plan which has been set up to receive a previous transfer from drawdown plans and subsequent drawdown transfers may also be accepted into the same plan.
The maximum and minimum income levels are recalculated by the new scheme administrator on receipt of the transfer value and a new three-year period starts from that date.
Beneficiaries taking drawdown after the death of the member may also transfer. The same rules apply.
The big disappointment is the refusal of the Revenue to reconsider its stance on the calculation basis for determining the transfer payment. Figures produced for the SPG suggest that, for members who are caught by the new regulations, transfer values could be reduced by anywhere between 20 and 80 per cent compared with current methods of calculation.
For those affected, that is a big price to pay for simplification and is another unwarranted attack on the pension savings of high earners.
The ability to transfer after the start of drawdown has been eagerly awaited and will present some interesting opportunities. Service and investment performance will become of increasing importance once product providers are no longer playing to a captive audience.
The simplification of the criteria for testing is welcome and will lead to some small but significant cost savings. An increased number of individuals will now be free to transfer from an occupation pension scheme to a personal pension without restriction.