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PFW fits the bill

For once, changes to the Finance Bill may actually achieve what they are meant to. The bill introduces a number of changes to pension fund withdrawal rules from October 1.

These changes are designed to ease administration and offer greater flexibilityto scheme members altho-ugh the system implications may prevent many product providers from taking immediate advantage.

The first change to allowa personal pension scheme to set a single review date for all of a person&#39s personal pension arrangements under income withdrawal.

If a client establishes their first pension fund withdrawal account on October 1 thisyear, any other PFW accounts established before October 1, 2003 will also have theirtriennial review date set at October 1, 2003. For example, Mr Smith establishes three PFW accounts from his main pensions on the following dates – October 1, 2000; January 1, 2002; July 1, 2003.

All three accounts will have a triennial review date of October 1, 2003, even though the account established in July, 2003 would have only been in operation for three months.

The result of this is that one or more PFW accounts would not be subject to a full 12-month period before included in the triennial review.

However, the period involved is to be regarded as 12 months for the purpose of PFW rules, namely the Government Actuary Department&#39s maximum and minimum levels.

It is not intended that all accounts will be consolidated in one plan at the triennial review. They will remain separate plans. PFW accounts in force before October 1, 2000, will be able to use the single review date as long as the scheme adopts the new rules.

The main problem so far with PFW triennial reviews has been that the following three years permitted maximum income levels have been subject to a valuation and GAD factors prevailing on a single day.

If, for various reasons, the markets are down on this particular day, the client&#39s maximum and minimum levelsare affected for the following three years whereas it may only take the markets two weeks to recover.

The new provision is to permit the triennial review to take place on any day within the 60 day period ending on the Triennial Review date. This will effectively do two main things: It will allow client&#39s to select the most appropriate value and GAD factor to set their limits for the next three years, be it high or low. For if the client only wants to take the minimum income they will elect the lowest fund value in the 60 day period. Secondly, it will enable the adviser to prepare the review report and make any appropriate recommendations.

A new section has been introduced which covers annuitisation. This allows “a single arrangement to be used – to purchase one or more annuities, for one or more trances of drawdown, or a combination of both”.

This allow part of the member&#39s personal pension to be used to provide retirement benefits, either in the form of annuity and/or PFW, without the need to be segmented and is expected to be effective from April 2001.

Scheme providers will need to decide whether to include the new annuitisation provisions, which, on the face of it, seem to offer very little extra when compared to the multiple arrangements for which the administration systems are already in place. Replacing the existing systems could be costly exercise, which ultimately will be passed on to the investor.

The Personal Pension Schemes (Transfer Payments) Regulations 2000, is also intended to permit additional flexibility and offer a very welcome new facility for those using PFW. These regulations are intended to be in place by April 2001but, at the time of writing, no date had been given as to when they will be effective from.

In terms of PFW, greater flexibility will be introduced to allow people with personal pensions to choose a different investment manager by switching their funds under an income withdrawal to a different personal pension scheme.

In essence, this will allow the thousands of PFW policy holders locked in an insurance company arrangement to transfer to a Sipp. As we have now learned, the additional costs of establishing and running a Sipp are far outweighed by the advantages of not be locked in to one provider.

Most Equitable Life drawdown policyholders will probably be glad of this facility, particularly if they have tried to operate PFW from a with-profits fund with maximum income withdrawals.

One of the main reasons for selecting PFW, rather than purchasing an annuity, is for the added flexibility and investment control.

The main feature of a Sipp is to take advantage of the widest range of investment opportunities, as no one investment company will be able to provide the very best returns in respect of all sectors in the market at all times. A Sipp therefore goes hand in glove with the very reasons for establishing a PFW account in the first place.

Philip RoseManaging director, Wentworth Rose


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