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Pension edge: John Lawson

When looking to protect tax-free cash, it should be remembered that clients will want the greatest investment flexibility available in 2006 at a competitive cost. This exposes the weakness of transferring to a self-invested section 32 policy now.

A-Day will bring many opportunities such as the ability to invest pension money in new asset classes. IFAs rightly want to ensure that their clients are best placed to take advantage of these new alternatives. However, in many instances this means that action will need to be taken now so that clients are in the right place before A-Day.

Protecting tax-free cash in occupational pension schemes such as executive pension plans and contracted-in money-purchase schemes is one such situation. In particular, how can clients who are currently entitled to more than 25 per cent of their fund as tax-free cash keep that right and at the same time benefit from the new investment flexibility?Providers of EPPs and Cimps are unlikely to develop investment options to allow self-investment. The simple reason for this is that these will become legacy products, so why would providers spend money introducing new options such as self-investment?This probably means that those in EPPs and Cimps who want to self-invest after A-Day will have to move somewhere else although EPPs and Cimps can protect tax-free cash rights if the client is happy with the existing fund choices.

We know from the new Finance Act rules that unless you have applied for enhanced or primary protection, rights to tax-free cash above 25 per cent will be lost if you transfer after A-Day. However, there is one exception to this rule and that is the block transfer. This rule protects tax-free cash rights above 25 per cent if two or more scheme members transfer all their benefits from one scheme to another scheme at the same time.

Clients wanting to take advantage of the block transfer route should ensure that they have another member in the scheme who also wants to transfer, for example, a spouse or a business partner. Another member can be added before or after A-Day.

So, to protect tax-free cash rights and self-invest, clients can either transfer before A-Day to another occupational scheme that offers self-investment, such as a section 32 policy, or transfer with another member to any self-invested pension after A-Day. This is the key decision which clients in this situation need to make.

The decision is very important because these clients will also want the greatest investment flexibility available to them in 2006 and at a competitive cost. This exposes the weakness of transferring to a self-invested section 32 policy now.

Yes, self-invested section 32 policiess do offer self-investment within the scope of the current rules. But come 2006, will these section 32s be prepared to administer holiday property in Spain? Or France? Or the US? What will their charges be for doing this work? Will providers of such section 32s confirm their post-2006 investment options and charges in writing now? Somehow, I very much doubt it.

On the other hand, making sure that your client is in a position to make a block transfer from their EPP or Cimp will allow them to scan the market after A-Day to find a self-invested pension product that meets their needs on choice and price. I cannot promise that Standard Life will administer foreign holiday property in our new self-invested personal pension from April 2006 but there is a good chance that some other provider will.

Adopting such a wait-and-see policy is probably the best choice.

One feature of some section 32s is that they are split into segments. Each segment will be regarded as a scheme in its own right after A-Day, allowing tax-free cash above 25 per cent of fund to be taken on a phased basis. Other occupational schemes will need to vest all benefits at once to get access to tax-free cash above 25 per cent. This includes funds that have been block transferred in.

This appears to give segmented section 32s an advantage. But what is the point of being able to phase benefits when you are stuck in a contract that does not allow you to invest in what you want or charges you an excessive amount to do so?Clients worried about the potential 35 per cent tax on death benefits that would apply where the fund is crystallised could consider taking out pension term insurance. This could be written up to 75 and the excess over the value of the crystallised pension fund, up to 1.5m, could be insured.

Now is not the time to make snap decisions for active scheme members. They can afford to wait until the market develops before they make their choice. Meanwhile, they can concentrate on maximising pension funding within current rules.

John Lawson is marketing technical manager at Standard Life

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