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Pension back on track

The A-Day changes bring some relief for a harassed businessman

I have had enough. Business is getting more difficult with all the rules and regulations being thrown at me. My blood pressure has gone sky-high. Please tell me there is some good news about my pension.

You have a very old with-profits executive pension plan with Clerical Medical. You will recall providing me with your earnings’ history. With this information, we logged with Clerical Medical the tax-free cash calculation under the pre-1987 rules as they applied to you at April 5. You had particularly high earnings in 1998, 1999 and 2000, creating a tax-free cash calculation of 140,000, which is more than 25 per cent of your fund. We will be able to refer to the higher cash calculation in the future when you retire.

As a single person with no dependants, the maximum amount of money that could previously have been paid as a death benefit would have been four times your pensionable earnings plus a refund of your contributions. If ever your fund had been more than this four times salary figure, the money could have been paid out and would have been returned to your company. This law has also been done away with and death benefits, including the value of the fund, can now be paid up to 1.5m, being the current lifetime allowance before we become concerned about taxation.

We have already executed a deed and adopted the new rules so that if you wish to elect to draw down an income from your pension fund instead of purchasing an annuity, you can do so.

But one change in your particular policy conditions means there is quite a dramatic alteration in regard to when benefits may be available. Previously, all our discussions concerning retirement benefits would have centred on the fact that, as a shareholding director of your own business, you would not be able to take benefits until at least age 60 unless you ceased all connections with your company. New laws do away with this restriction and you can now take benefits at any time from age 50 (or 55 in 2010) regardless of your employment status. Interestingly, you could take just your tax-free cash and delay taking an income until later. Technically, what you are doing here is taking tax-free cash and effecting drawdown with no actual income being taken.

But it is the terms and conditions of your policy, when originally taken out, that we now must look to. You have a guaranteed annuity rate within your contract of 7.41 per cent at age 53. On the open market for a similar type of annuity, the best rate I can obtain is 5.63 per cent with Scottish Equitable. You now have access to this guaranteed rate without having to cease employment at any time from now.

Interestingly, we can also look at the guaranteed rate that would be applicable if you decided to delay taking your benefits until a later time. The current bonus being provided to most guaranteed annuity rate contacts is very little. There is nothing to say that good bonus rates may not return in the future but, if we take a low assumption over the next five years, we have a situation where we can see exactly what pension you will receive after tax over the next five years and compare it with what an increased fund would buy utilising the guaranteed annuity rate for someone five years older. This calculation shows that if you delayed taking your pension for five years, you would have to live a further 19.5 years from five years time to receive the same amount of money.

There are obviously many other factors we would have to take into account. Are worldwide inflation and interest rates going to rise to the point where open-market annuity rates are better than your guarantee? Clerical Medical is not currently not applying any market value reduction to your pension fund so you could change the investment of your fund and achieve a better return.

If you are looking for comfort, everything with regard to your pension is good news. We need to sit down and look at what your anticipated income from your business is going to be over the coming years. We can then decide whether it would be better for you to start drawing a pension using the old guaranteed rate under the new laws.

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