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Like it or lump it

I have an executive pension plan with a fund value of £100,000 and a tax-free cash limit of £35,000. I gather that the new pension rules do not allow me to transfer this fund without reducing my tax-free cash limit to 25 per cent of the fund. Is that correct?

This is generally correct but there are circumstances where you will still be able to protect your higher tax-free cash amount.

If the executive pension plan has more than one member, you can protect your higher tax-free cash if you effect a block transfer. This is when at least two members transfer all their holdings to the same receiving scheme in the same transaction. This obviously means that you must find another member of the scheme who wishes to take the same action as you.

Another scenario in which you will be able to keep your higher tax-free cash limit is if the EPP is wound up and all the funds are transferred to trustee buyout plans. This will require agreement of the trustees of the scheme and will obviously affect all members but in many cases trustees are happy to do this as it reduces their liability and additional duties that have been introduced from April 2006, for example, the rather onerous trustee reporting requirements.

If you are the only scheme member, then things are a little simpler. In this case, it is also likely that you are a trustee of the scheme. If the scheme is wound up, you are able to transfer to a section 32 policy and retain your higher tax-free cash limit. You can choose the section 32 that you wish to transfer to rather than having to rely on the trustees to choose a buyout plan.

It is possible that you have enhanced protection and tax-free cash under the new pension rules. In this case, your overall tax-free cash limit has been converted into a percentage of your total pension funds and each of your pensions can pay this percentage when you vest the funds. In this scenario, you are able to transfer your EPP to any policy and the maximum tax-free cash will be unchanged as the enhanced protection provides an overall taxfree cash limit rather than a limit at policy level.

If none of the above apply in your circumstances, then you need to consider the reasons why you are looking to transfer. It could be that your EPP has high charges and/or the investment choice is limited and/or the policy does not give you full flexibility at retirement. All these are valid reasons to consider a transfer to an alternative policy that better suits your needs. In this case, it is worth looking more closely at how a transfer will affect your tax-free cash position.

The tax-free cash limit applied to your EPP is a fixed amount that increases over time in line with the retail prices index and is not related to the actual value of your policy.

If you transfer and are unable to retain this limit, then your tax-free cash will be limited to 25 per cent of your fund value, so the amount will be linked directly to the value of your policy.

As these limits do not work in the same way, it is difficult to assess the future outcome but we can make some assumptions to give examples. For these purposes, I will assume you have a 15-year term until retirement.

If we assume that RPI is 3 per cent a year for the next 15 years, your tax-free cash limit under the EPP will increase to £54,510.

If we assume an investment growth rate of 5 per cent a year on your fund, then it will grow to £207,871 in 15 years time. If your tax-free cash limit becomes 25 per cent of the fund on transfer, this will result in a maximum limit of £51,967.

As you can see, on these assumptions, the 25 per cent limit is catching up with the higher fixed limit. If RPI is lower compared with the investment growth you achieve, the 25 per cent limit could catch up and possibly overtake the fixed limit by the time you wish to take benefits from your pension.

However, you should also consider the outcome in other scenarios. For example, if your fund value does not grow in excess of RPI or goes down, then the tax-free cash you will receive could be much less after transfer.

Without assessing the full details of the EPP, your personal circumstances and your priorities, no recommendation can be given. However, it could be that your motives for wanting to transfer outweigh the potential loss in tax-free cash at retirement, so blanket advice not to transfer is not really appropriate.

Emma Duncan is a director of Thameside


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