View more on these topics

Keep USP simple

There is no doubt that the market after A-Day for unsecured pension (USP) and alternatively secured pension (ASP) will be attractive to many. Our own research suggests that most in the advisory market agree. The increased flexibility for taking income up to and beyond 75 and simplification of the treatment of occupational and protected rights income withdrawal is good news.

However, the rules on income withdrawal and pension transfers make transfers into USP arrangements a logistical nightmare in some circumstances.

Schedule 28 of Finance Act 2004 (FA04) includes the rules for USP and ASP. Section 169 FA04 and the draft Pensions (Transfer of Sums and Assets) Regulations deals with pension transfers. These rules add a huge amount of complexity that is at odds with the stated aim of simplification. This was to enable people to make clear and confident decisions about pension savings and reduce the administration burden on pension providers.

Ever since PIA Update 67 (June 1999), it has been suggested that risks to consumers may have been explained in a manner that they would not understand. In November 2005, an FSA good practice update pointed out “We will continue to monitor this market as part of our risk-based supervision and will communicate with firms identified as active in this market. They will be required to review their income withdrawal arrangements and report back to us.”

To explain the complexity, let us look at an example. The question you must keep in mind is – can I ensure that my client understands this process and the nature of the risks involved?

Mr John Smith has a personal pension contract with ABC Life which contains one arrangement. Mr Smith reaches his selected retirement age and chooses to enter USP rather than buy an annuity. His income needs do not require him to use his entire pension fund. He decides to move or “designate” (as the new rules provide) half of his fund value to USP. This is achieved by moving the funds to a new plan, Plan A, but Mr Smith still only has one arrangement under the scheme, that is, no new arrangements have been created. The designation generates the maximum income level and review date for Plan A.

All easy so far, however, Mr Smith also has three existing USP contracts with XYZ Life and wishes to transfer these to consolidate them with his Plan with ABC Life. These plans were the result of a phased retirement plan where the money moved from a Personal Pension contract over a three-year period to provide income. XYZ Life does not offer a consolidated review period. As they were moved to income withdrawal at different periods of the year they all have different review periods.

The USP contracts with XYZ Life are transferred into Plan A. The plan must retain the arrangement structure, the review date and maximum income levels of the old originating contracts (new rules again).

So a new segment must be created in Plan A for each incoming transfer. Therefore Plan A now has 4 segments, each with different arrangement structures, limits and review dates. The new segments must mirror the number of arrangements that were held in the old USP contract, for example, if each of the old plans represented 330 arrangements, this must be recorded by ABC Life.

I think you will agree it is not unusual for a client to consolidate a range of income withdrawal plans with an existing personal pension. The result of this scenario is that Mr Smith will have four five-yearly review periods, four separate maximum income limits and hundreds of arrangement structures.

The complexity does not stop here as Mr Smith still has the other 50 per cent of his first fund with provider ABC which he can continue to designate to Plan A.

It is difficult to see how the client can get a full understanding of the operation of the contract. Without this basic building block, you must question whether you have any chance of ending with a consumer that fully understands the nature of the risks.

Leaving the rules as they are would seem a simple and desirable solution.

Billy Mackay is pension marketing manager at Skandia

Recommended

Hippy hippy shake-up

Canny FTBs could find some bargains ahead of the introduction of Hips

Canada Life rejigs group protection

Canada Life is revamping its group income protection products by simplifying the maximum benefit formula, improving free cover limits and removing HIV/Aids exclusions.

Double standards

I think the normal way to start some letters is: “I read with interest.” Well, in this case, I shall start: I read with astonished incredulity John Ellis’s article in Money Marketing referring to the PFS/CII code of ethics which encompasses such things as integrity, professionalism, competence, skill, care, diligence and objectivity. Were any of […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com