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Revenue pulls mat from under s32s

James Phillipps reports on the ramifications of the latest rule change

To section 32 or not to section 32? For many, that will be the question in the next few months. But with continuing confusion over the emerging pension simplification rules, how are IFAs expected to advise clients?

The most recent move by HM Revenue & Customs is designed to ensure that people in occupational schemes that wind up after A-Day will have their benefits protected. This has massive ramifications for the pension transfer market as it removes the basis for many transfers to s32s.

Scottish Equitable pensions development manager Rachel Vahey admits her firm has “banged the s32 drum” but says it is retreating in light of the rule changes.

Vahey says: “The rule changes have certainly altered the way we perceive the s32 market. We were pushing s32s so hard because with- out the rule changes there was an advice bottleneck building. That cut-off point has been removed now.”

ScotEq will have to dump all its current s32 marketing literature but Vahey says, despite the thousands of pounds this will cost the firm, the consumer is the winner – which is all-important.

Scottish Widows head of pensions market development Ian Naismith says: “Scottish Widows initially pointed out the anomaly that if the trustees bought out benefits for members of a scheme before this rule came in, the members would lose their tax-free cash entitlements and benefits.

“It does have a knock-on effect on the transfer market and there is certainly not the same urgency to transfer. It does not kill s32s but it removes a substantial portion of the market.”

Norwich Union and Standard Life have been among the most vocal companies in promoting alternative transfer options to s32s in the most situations.

NU head of pensions Iain Oliver and Standard Life marketing technical manager John Lawson have both said publicly that they believe a number of providers have exploited the complexity of the pension simplification rule changes to push s32s – a bold accusa- tion that rivals have understandably refuted.

Winterthur pensions strategy manager Mike Morrison says they could be seen to be patronising advisers, who are capable of making their own product decisions based on clients’ needs.

But Richard Jacobs Pensions & Trustee Services director Richard Jacobs asks if the pension gurus cannot agree on their interpretations of the rule changes, what hope is there for the average IFA?

Jacobs says: “It is getting crazy. When you get the likes of ScotEq and NU arguing, who the hell are we to believe? I have tended to agree that s32s have been overplayed but, despite some people undoubtedly having been moved needlessly, there are good reasons for some individuals to consider them.”

What of those advisers who have already transferred clients into s32s? To be fair to them, they had been encouraged to act quickly to prevent a backlog next April but, clearly, some clients will have transferred needlessly.

Vahey says: “It will be interesting to try and figure out how many people fall into that position. A lot of advisers may have got two-thirds of the way through the process and can turn it round. It is difficult, though, because you can only play with the rules at any given time and advisers have done that in good faith. In some ways, you could say they should be applauded for taking action early.”

Oliver points out that the situation may have strained relationships between some advisers and their high-net-worth clients. He says: “The problem is those poor customers incorrectly advised to go into s32s will have to live with the consequences.”

These may include restricted investment choices and less asset allocation free- dom than a self-invested personal pension although tax-free cash benefits will have been preserved.

Interpreting rules in a changing environment may feel like a a thankless task for many providers. Now, it is time for them to quietly get on with helping advisers understand what the rule changes mean so they can advise clients accordingly.

Probably never before have s32s been so much in the spotlight but it looks like their 15 minutes of fame are up.

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