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More concerns on with-profits

Having read numerous articles about the pros and cons of traditional

with-profits funds with their attaching guarantees, we have come across two

cases where the attaching guarantees and the very nature of the contracts

have put our clients at a potential and significant material disadvantage.

In both cases, each client was a member of an executive pension plan. In

both cases, the members had left that employment and in one of the cases

the previous employer is no longer in existence.

The clients&#39 salaries are effectively set in stone at date of leaving, as

is their service, which has obviously come to an end. Therefore, under

occupational pension scheme rules, there is a maximum pension that can be

paid from this contract.

However the guaranteed sum assured and attaching bonuses, at normal

retirement age, will provide a fund potentially significantly greater than

that allowable under Inland Revenue rules. Any surplus would go back to the

previous employer – no longer in existence in one case.

The alternative would be to consider a transfer to a personal pension

subject to overfunding checks at point of transfer.

But in this particular case, the transfer value on offer is £34,600.

The guaranteed sum assured and attaching bonuses so far are about


The ultimate fund at retirement is likely to be significantly in excess of

this as no doubt there will be further annual bonuses and a terminal bonus.

The client is therefore in a no-win situation as the transfer away from

such a contract would be prohibitively expensive and unjustifiable. Should

our client sit and watch the inevitable overfunding occur or suffer

substantial financial penalties?

We have written to the insurance companies concerned to ask whether they

would consider – assuming that they keep the existing funds and no

alterations are made to the investments whatsoever – amending the

documentation from an EPP to a PPP as part of an internal transfer at no

cost to the clients.

It would appear that this is not possible and I wonder whether the

companies are either unable or unwilling to accommodate this.

These cases have occurred in quick succession and cannot be isolated


I note that the FSA has this week highlighted a number of concerns about

with-profits funds and there will be a review further to the release of a

discussion paper as part of a year-long review of the industry.

There is to be an open meeting on June 18 to discuss these issues. Perhaps

the FSA could ask insurance companies to look at these situations as such

contracts do not sit well with current flexible employment practices.

Christopher Lean

Financial planning manager, Kingsway Financial Services, Wrexham


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