We were contacted by a 53-year-old woman who was made redundant when her employer, a well-known airline, was placed into receivership. She had been informed that her previously guaranteed final-salary pension fund was underfunded and the transfer value had fallen from £346,000 to £226,000 in 12 months. She was very angry with her employer and scheme trustees and wanted nothing further to do with them, preferring to take control of her pension herself.
The scheme was now being wound up. What were her options?
What the client wanted cut across the process the FSA would expect us to carry out in defined-benefit transfer cases. Before looking at the pros and cons of individual arrangements – personal pensions, stakeholders and section 32 buyouts – we would normally explore the options presented by the ceding scheme trustees, in this case, a deferred annuity from Prudential, and any possibility of transferring to her new employer's occupational money-purchase scheme.
A further complication was that we were working on a fee basis. If we undertook research and reported on options which the client specifically told us she did not want to consider, she could refuse to pay for our work in these areas. Equally, if we failed to advise her on all her options as laid down by the FSA, we were potentially liable to rebuke, possibly worse.
Having sought and failed to obtain guidance from the FSA, we decided that we should include all the options open to the client to ensure she understood what she was rejecting.
As well as the usual financial questionnaire, we asked her to complete a transfer attitude questionnaire to clarify her feelings. This provided valuable information because it became apparent that she did not need to take her pension benefits at normal retirement date and, although she wanted to take the tax-free cash to buy a buy-to-let property later, she did not need the income. She was happy to take a reasonable degree of risk with both her pension fund and the income.
We set out the following options. She could take her pension immediately. The ceding scheme would not offer early retirement enhancements, so the reduction she would suffer was considerable. She was also in excellent health, so no other enhancements could be secured. While guaranteed, the modest income would be taxed at her highest marginal rate of tax, probably 40 per cent while she continued to work. As a member of her new employer's occupational scheme and earning more than £30,000, she could not reinvest any of the income into a stakeholder pension and recycle the tax relief.
The client could leave the trustees to use her pension fund to buy a deferred pension annuity with Prudential. This would provide a degree of security and separate her benefits from her ex-employer and the scheme trustees. She would be able to defer taking benefits until scheme NRD or later if allowed by the provider.
The client could transfer the cash-equivalent value to her new employer's occupational scheme. The new employer would bear some of the admin costs but the investment choice was quite limited and the funds were managed by AMP NPI although this was being reviewed. The client felt that, having been let down so badly by her previous employer and scheme trustees, she did not want to entrust her much depleted fund to her new employer and its scheme trustees although she would join the scheme to benefit from its contributions.
We then set out the options using individual pension arrangements and the risks to her pension fund and potential retirement income she would be taking on. She wanted a large degree of control over her investment options, so we looked at self-invested policies, including a very attractive and cost-effective self-invested s32 buyout policy through Transact via Integrated Financial Arrangements. She was put off by the breadth of investment options in self-invested policies and instead we concentrated on multi-manager policies from providers offering portfolio planning tools. Scottish Equitable offered the best combination of a competitive single-charged policy, flexible terms including the potential for drawdown, wide investment choice and a good portfolio planning tool both in personal pension and s32 buyout forms.
We calculated the transfer critical yield as being 7.8 per cent and explained its implications. Our client decided that having experienced what guarantees could mean – a loss of over a third of her fund in 12 months – she would rather take control of her fund directly and she instructed us to transfer her fund to a Scottish Equitable personal pension transfer plan.