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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


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